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American Express: Still an Attractive Buy for Banks and Investors?

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Mar. 15 2016, Updated 9:10 p.m. ET

Earnings outlook

American Express (AXP) expects its EPS (earnings per share) to be adversely affected on a YoY (year-over-year) basis due to factors such as the cumulative effect of increased competition, pricing regulation, the strong US dollar, and the 2016 expiration of its co-branding relationship with Costco Wholesale (COST). The company expects its 2016 EPS to be in the $5.40–$5.70 range. It looks to return to positive EPS growth in 2016 and is targeting a minimum EPS of $5.60 for 2017.

That said, the company’s fundamentals look weak in the medium term. The impact of these challenges will depend on factors including the company’s ability to offer attractive products and services to cardmembers, to grow other sources of revenue, and to implement expense control initiatives.

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Valuations

AXP’s stock has fallen by 27% in the past year. The company is currently trading at 10.9x on a one-year forward price-to-earnings ratio, compared to the industry average of 18.7x. The discount has widened over the past few quarters on higher expenditures toward services, marketing, and new partnerships. Its major competitors are trading at the following premiums:

  • Mastercard (MA)—28x
  • Visa (V)—25x
  • Discover Financial (DFS)—12x

Together, these companies account for 1.9% of the iShares Core S&P 500 ETF (IVV).

The coming phase for American Express

American Express’s relatively low valuation, along with its increased spending on new partnerships and clients, has made little impact on its stock prices. The company is targeting cost savings of $1 billion by 2017, which should boost its operating margins. However, investors continue to be skeptical on how the company can revive its partnerships amid increased cost competition.

Without doubt, American Express is going through a restructuring phase. Industry dynamics are changing rapidly with the introduction of smartphone digital wallets, resulting in a loss of brand value for card companies. Card issuers will have to push through marketing efforts and new partnerships in order to survive in this competitive market. Any takeover bids can attract a decent premium on current prices, but in the case of failed attempts or continued weak operating performances, we could very well see further declines in AXP’s stock price.

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