A Look at American Express Company (NYSE:AXP)’s Future?
- AXP’s 4Q revenue contracted 7.6%YoY.
- AXP targets 100 million loyalty program partners in the next 12 months.
- AXP targets a slice of the $4.8 trillion small business spending.
American Express Company (NYSE:AXP)’s 16-year card agreement with Costco Wholesale Corporation (NASDAQ:COST) is about to formally come to an end – in March 2016. The loss of Costco business is one of the major concerns being highlighted when it comes to finding clues about the future of AMEX.
Increasing competition from the major card networks Visa Inc (NYSE:V), Mastercard Inc (NYSE:MA) and adverse foreign exchange fluctuations are other causes for concern over AMEX’s future. Additionally in the longer term the changing digital payments landscape poses an unknown threat. However, a closer look at American Express shows that beyond these dark clouds, there may lie some bright spots that many investors have largely ignored. This AMEX analysis article looks at the strengths and opportunities and what could come out of them. But first, here is a recap of American’s last quarter results plus a chart showing its quarter revenue trend over the last five quarters.
4Q Earnings highlight
American Express Company (NYSE:AXP) earned a net income of $899 million, translating to EPS of $0.89 in 4Q2015. Earnings contracted from $1.39 a share a similar quarter a year earlier, but that was largely because of the $335 million write-down related to technology assets and other items. Revenue of $8.79 billion descended 7.6% from a year earlier, again largely because of adverse foreign exchange movements.
Analysts on the average were looking for EPS of $1.12 on revenue of $8.34 billion in 4Q.
American Express’ quarterly revenue chart (below) leaves no doubt that the company is struggling to propel its topline growth. However, as forex-related topline challenges moderate and the managements expands abroad, especially among small merchants, stronger revenue growth can be achieved.
American Express’ EPS estimate for 2016 is largely in line with Street estimates, but 2017 EPS estimate of $5.60 falls short of the consensus estimate of $5.99.
American’s near-term/long-term strengths
American Express Company (NYSE:AXP) expanded in to loyalty program offering through the acquisition of Loyalty Partners back in 2011. Today, the company has Plenti as its loyalty program for the U.S. market with versions of the same abroad. Plenti’s partners include Rite Aid Corporation (NYSE:RAD), Exxon Mobil Corporation (NYSE:XOM), AT&T Inc. (NYSE:T), Macy’s, Inc. (NYSE:M) and others. Most of American’s present Plenti partners are those with about 100 million customers. However, AXP’s strategy is to bring everyone on board, which is why the company is targeting even smaller merchants with Plenti loyalty program.
AMEX is targeting more than 100 million loyalty program partners globally over the next 12 months. Expanding loyalty partnership should unlock more revenues. In the loyalty program business, the company generates income through card spending and managing of loyalty program on behalf of the partners.
The company has always boasted that AMEX users are of higher value and they currently charge 3-4x more per year but on only 1.5x more transactions.
American Express Company (NYSE:AXP) is employing various strategies to propel merchant acceptance of its cards. In the U.S. the company has OptBlue. Through OptBlue, the company is providing smaller vendors with low-cost and simplified payment processing, thus allowing them to accept American credit cards without taking on much burden.
With OptBlue, American Express could close the acceptance gap with the larger card network rivals, first in the U.S. and then abroad. Targeting smaller merchants is not only strategic in expanding acceptance, but also beneficial to the bottom-line given that small merchants tend to pay higher rates compared to the larger counterparts.
American Express’ OptBlue also provides a way for the company to grab more of the small business spending. It is estimated that small business spending is worth about $4.8 trillion annually, but only a tiny fraction of the spending at just 10% happens through cards. As such, there is a huge long-term growth opportunity in increasing exposure to small businesses.
There is plenty of growth opportunity for AMEX in co-branded card partnerships. Although the agreement with Costco is coming to an end, AMEX remains committed to grabbing a larger share of the co-branding card market. The company is seeking out new partners and refreshing agreement with existing partners.
With the exit of Costco, AXP has signed Sam’s Club for a co-branding deal. It is work noting that Sam’s Club is a competitor of Costco.
American Express Company (NYSE:AXP) is aggressively expanding abroad and the effort should pay off in the long-term. The company is using versions of its OptBlue program to drive global growth, especially among small merchants. On the international scene, AMEX’s management appear to be paying more attention to China, Japan, Mexico and the U.K. with its loyalty programs. India is another significant international opportunity in the view of American Express’ management.
Part of the reason AMEX is interested in broader international presence is that fact that cash and check still dominate payments in many international markets. About 85% of global transactions are still cash/check-based. However, card benefits such as security and convenience are driving secular shift to plastic payments in emerging economies. AMEX wants to ride that secure trend. The shift to electronic payment and consumer spend growth are tailwinds for American Express.
American Express’ growth is mixed, combining acquisitions and organic efforts. Although it doesn’t seem like the company will be doing a transformational M&A in 2016, it is more likely the company will continue inking strategic partnerships domestically and abroad. However, it should not come as a surprise that some of AMEX’s present partners become its acquisition targets in the future.
When it comes to acquisitions, AMEX prefers assets that add more capabilities and drive differentiation.
Apart from acquisitions, American Express prefers to return access cash to shareholders. The company returns value to shareholders through shares repurchases and dividends. American pays quarterly dividend of $0.29 per share. As for repurchases, the company buys back shares worth between $4.5 and $5.5 billion annually. The existing buyback authorization expires in June this year.
Stock buybacks and dividends serve many roles. They strengthen shareholder confidence in the stock and boost earnings per share.
Beyond the changing landscape, VISA and Mastercard are more widely accepted and many vendors push consumers to use something besides AMEX if possible due to higher processing rates. If competition continues to be fierce, AMEX could be forced to narrow costs hurting revenue further.
American Express Company (NYSE:AXP) will likely remain in a fighting mode this year, but its efforts to drive growth should pay off over the long-term. The company continues to face increased pressure from competitors and the digital payment space. This has the potential to drive down and pressure both revenue and margins. One investor ValueAct decided to throw in the towel. However the company still generates significant cash and will continue to return it to shareholders. The company remains strong but is no longer the company of yesteryear that could brag American Express Don’t Leave Home Without It. The company needs to find a way to entrench itself for the future as it faces the challenges of today.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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