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American Express Trades at a Discount, Buyout Could Yield Premium

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Mar. 23 2016, Updated 10:05 a.m. ET

Earnings outlook

American Express (AXP) expects its earnings per share (or EPS) to be adversely affected year-over-year 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 (COST).

The company expects its 2016 EPS to be between $5.40 and $5.70. It looks to return to positive EPS growth in 2016 and is targeting a minimum of $5.60 EPS for 2017. Analysts estimate $5.38 earnings per share for 2016 and $5.49 for 2017, reflecting lower estimates.

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The company’s fundamentals look strong over the long term. The impact of the Costco breakup on its results should dissipate with time. Company growth will depend on factors such as the company’s ability to offer attractive products and services to cardmembers, grow other sources of revenue, and implement expense control initiatives.

Valuations

American Express’s stock has fallen by 27% over the past year. The company is currently trading at 11.1x on a one-year forward price-to-earnings basis compared to the industry average of 17.1x. 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).

Buyout option

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

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 falls in AXP’s stock price.

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