The latest guidance from American Express (NYSE:AXP) is a prime example of what happens to a premium brand that is losing pricing power. The loss of some high-profile deals last year is apparently only the beginning.
The stock cratered to new multi-year lows on the weak guidance for 2017. AmEx is back to early 2013 levels, but should investors rush into the stock at these prices?
Lack Of Growth
The biggest issue facing AmEx is that the company isn't able to pull the growth levers of the past. The stock held up somewhat following losing the Costco (NASDAQ:COST) co-brand deal due in part to the forecast that the payments network could reignite growth in the future.
AmEx earned $5.56 per share back in 2014 and now forecasts that the company can possibly earn in excess of $5.60 in 2017. The updated estimate falls far short of analyst estimates for well over $6 by next year due to the company forecasting growth returning to nearly 15% by that year.
The main problem is that consumers don't value the brand as much anymore and businesses are no longer willing to pay higher fees in order to form a co-brand relationship with AmEx. A business like Costco or JetBlue (NASDAQ:JBLU) no longer has a reason to partner with AmEx if consumers are shifting to Apple (NASDAQ:AAPL) Pay and other mobile payment services where the network isn't even that visible to the consumer. The brand power of Apple is more important to consumers than the power of AmEx
The following chart highlights how the EPS expectations continue to collapse.
The stock may appear cheap at roughly 10x EPS estimates, but at this point the market is lacking clarity on where earnings eventually end up.
The prime reason that revenue growth isn't going to pick up is that AmEx expects to see further pressure on the discount rate that generates nearly $5 billion in quarterly revenue. The firm produced an average swipe fee of 2.42% during Q4, but the rate is expected to decline in 2016 due the expansion of OptBlue, International regulatory changes, and competitive pressures.
In essence, nobody in the world wants to pay 2.4% for each transaction from low credit risk customers.
The prime reason for losing the Costco business was the desire to lower the fees paid to the payment network. Losing the business reduces the transactions on the network and the loan portfolio.
For year end, the loan portfolio shrunk by roughly $14.9 billion with $13.8 billion related to Costco and $1.1 billion for JetBlue. The end result is that loan balances are down from $70.4 billion to end Q4'14 to only $58.6 billion for Q5'15.
Source: AmEx Q4'15 presentation
The end result is that analysts expect declines in 2016 and 2017 revenues that still appear very aggressive considering the business already lost.
At this point, AmEx appears like a value trap in denial. The payments network is losing a substantial amount of business, yet the company still forecast that revenue would return to solid growth in 2017. Now AmEx forecasts revenues and earnings growth stalling for another year.
Based on the current competitive environment in the payments and credit area, the logic suggests AmEx struggles to maintain business, much less grow going forward. As always, due to the value proposition, investors are encouraged to keep the stock on a watch list for whenever the trend changes. Until that point, avoid the value trap.
Disclosure: I am/we are long AAPL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.