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Amex’s Valuations Imply Slower Growth and Uncertainty

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Earnings outlook

American Express (or Amex) (AXP) expects its EPS (earnings per share) to be adversely affected year-over-year. This expectation is due to factors such as the cumulative effect of increased competition, pricing regulations, a strong US dollar, and the 2016 expiration of its co-branding relationship with Costco (COST).

American Express expects its 2016 EPS to be $5.40–$5.70. It expects to return to positive EPS growth in 2016 and is targeting a minimum of $5.60 for 2017.

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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. The impact of these challenges will depend on factors such as the company’s ability to offer attractive products and services to card members, grow other sources of revenue, and implement expense control initiatives.

Valuations

American Express stock has fallen by 19% over the past year. The company is currently trading at 11.6x on a one-year forward price-to-earnings ratio compared to the industry average of 19.6x. 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 Services (DFS): 12x

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

American Express’s low valuation, along with its increased spending on new partnerships and clients, should reflect in its stock price going forward. The company is targeting cost savings of $1 billion by 2017, which should boost its operating margins.

American Express is going through a restructuring phase. Its new initiatives and aggressive spending should help it gain new partnerships and clients. However, industry dynamics are changing rapidly with the introduction of smartphone digital wallets. This trend has resulted 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.

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