American Express Company AXP held its annual Investor’s Day event Thursday, hoping to reassure investors spooked by the company’s loss of the Costco Wholesale Corporation COST co-brand account, and its announcement of $1 billion in cost reductions last month. The credit card market has squeezed AmEx, as its higher swipe fees face intense competitive pressure.
The credit card issuer began its investor day presentation by identifying macro headwinds such as slowdown in the global economy, a strong dollar, the decline in oil prices and a regulatory and competitive environment that were affecting the company’s outlook.
The company highlighted its closed-loop model, through which AmEx acts as both card issuer and acquirer. The relationship affords AmEx greater insight into its customers’ spends.
The company presented two growth scenarios for the year, one based on recent revenue trends and the other anticipating stronger revenue growth than expected. The former sees revenue growth of 4 percent and EPS growth of 5 to 7 percent, while the more bullish forecast expects revenue to grow by 6 percent and EPS to grow by 10 to 12 percent. The company beat earnings estimates by $0.10 on its most recent quarterly report in January.
AmEx said that its 2016 and 2017 estimates were “heavily impacted” by Costco’s exit from its portfolio. Costco brings with it 7 million cardholders and $76 billion in billings. Co-brand billings accounted for 31 percent of AmEx’s billings in 2015.
The company was looking to see U.S. consumer billings growth of 8.6 percent, but domestic spend only increased by 4.7 percent, down from a 7.2 percent increase in 2014. The average U.S. AmEx holder spent $13,600 on their card in 2015.
As far as strategic pivots, AmEx said it plans to focus on small- and mid-sized business acceptance, markets it identified as “under-penetrated and fast-growing.”
Analysts were mixed on the company’s presentation. Generally, firms were unimpressed by the company’s reaction to pressures and saw its guidance as overly optimistic.
Too Little Or Too Late?
Credit Suisse’s Moshe Ourenbuch thinks it’s too “late in the cycle” for the company to focus on squeezing additional balances out of its customer base, which “is likely to pressure the company’s multiple.” He offered an Underperform rating and a $62 price target.
Ourenbuch also felt that the company underestimated the stiffness of its competitive environment, writing “the competitive environment is likely to continue to intensify, making it difficult to achieve forecasts.”
Ourenbuch offered EPS estimates of $5.32 and $5.20 for 2016 and 2017, noting his estimates were 5 to 7 percent lower than management’s.
Macquarie analyst Vincent Caintic gave AmEx an Underperform rating and a $59 price target.
Caintic focused on the company’s two “key strategic decisions,” its push for volume growth and a drive to increase U.S. lending, while noting the issuer “underappreciates the competitiveness of the card lending space.”
The analyst believes AmEx has a “less competitive edge” in the volume game, and concluded with a warning to avoid the stock. He recommended that investors looking for transaction or card loan exposure should look to Visa Inc V and Discover Financial Services DFS, respectively.
Big Data Potential
Morgan Stanley analyst Cheryl Pate offered AmEx an Equal Weight rating and $64 price target. Pate saw more upside to AmEx’s situation, and focused on the big data potential in the company’s closed-loop model. “The opportunity to leverage data more broadly in a variety of applications” is “key to executing initiatives,” she wrote.
AmEx’s big data capabilities will come into play as it re-focuses on increasing existing spend, Pate says. The company could use customer data to aggressively target cardholders with offers. She was also bullish on the company’s planned $1 billion cost reduction.
“We believe AXP can successfully execute on the expense initiative, based on its solid track record on expense reductions, and believe there could be upside to exceed the target,” she concluded.
The company’s confidence seemed to trickle into investor sentiment. AmEx stock was up about 2 percent before noon Friday.
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