AXP - American Express

[Guest Schwab711]

ValueAct, a board favorite, just took a $1b stake and stated they'd "like to see changes" at AXP. I'm not sure what changes those could be, does anyone have any thoughts?

 

They are trading at ~14x P/E and ~15x-16x fwd P/E. Growth should continue in 2017 after a rough 2016 (COST exclusivity ends in mid-2016). The COST deal represented ~1% of all payments and 10% of all loans, if I'm remembering correctly. I don't think COST changes the moat so AXP does represent a tremendous value if you believe in AXP's advantage.

 

For those that have purchased AXP or are looking at it, what are your estimates of rev/earnings without the COST contract?

[merkhet]

I thought Costco was 20% of loans

[thepupil]

if you believe in AXP's advantage.

 

I looked at it a while back but couldn't get comfortable. I think I'll miss out on what will prove to be a cheap stock but I has a few issues.

 

What is their advantage? With their traditional segment (charge cards to wealthy)  being attacked from lots of angle and them growing by giving a credit card basically everyone, to me they look more and more like just any other lender.

 

I couldn't get comfy with what appear to be permanent shifts in the biz (and I think the value proposition of the platinum and gold cards has decreased a lot and I feel like they are really at risk of losing their core customerit will never be the same without the free drinks at delta and American :) )

 

It looks like they make all their money on NIM minus charge offs now and charge offs have gone nowhere but down as we've moved out of a recession. I can't get comfy buying a consumer credit bank at a fat multiple of tangible book many years into a recovery, but that could just me being paranoid Peter or negative nancy.  I think short term rates going up will hurt more than help them because their liabilities will likely adjust quicker than their fixed rate assets.

 

Their business travel agency thing division in my experience is a terrible value proposition and I'm always amazed the places where I work continue to use it.

 

but like I said, I'm probably a my wrong and my concerns are probay in the stock price.

 

Delayed At airport, please ignore typos and grammar. I wish I was in the admirals club, but I got rid of my Amex.

[Guest Schwab711]

I thought Costco was 20% of loans

 

http://www.thestreet.com/story/13144228/1/american-express-building-plenti-rewards-program-into-key-part-of-life-after-costco.html

 

You are right, 20% of loans.

[HJ]

if you believe in AXP's advantage.

 

I looked at it a while back but couldn't get comfortable. I think I'll miss out on what will prove to be a cheap stock but I has a few issues.

 

What is their advantage? With their traditional segment (charge cards to wealthy)  being attacked from lots of angle and them growing by giving a credit card basically everyone, to me they look more and more like just any other lender.

 

I couldn't get comfy with what appear to be permanent shifts in the biz (and I think the value proposition of the platinum and gold cards has decreased a lot and I feel like they are really at risk of losing their core customerit will never be the same without the free drinks at delta and American :) )

 

It looks like they make all their money on NIM minus charge offs now and charge offs have gone nowhere but down as we've moved out of a recession. I can't get comfy buying a consumer credit bank at a fat multiple of tangible book many years into a recovery, but that could just me being paranoid Peter or negative nancy.  I think short term rates going up will hurt more than help them because their liabilities will likely adjust quicker than their fixed rate assets.

 

Their business travel agency thing division in my experience is a terrible value proposition and I'm always amazed the places where I work continue to use it.

 

but like I said, I'm probably a my wrong and my concerns are probay in the stock price.

 

Delayed At airport, please ignore typos and grammar. I wish I was in the admirals club, but I got rid of my Amex.

 

While I generally agree with your perspective on the fundamental aspects of the business, the question really is whether it's priced in at the current multiple. 

 

It's still a premium business.  Hard for me to rationalize that they should trade at the same multiple (P/E wise) as a generic regional bank.

 

As for the activist angle, it's Ken Chenault's board.  As long as Buffett is on his side, just don't see ValueAct making that much headways.  Feels like KO situation all over again.  I happen to believe this management is a bit fat and lazy and can use a nice kick.  The board seem to be quite inbred and can use a couple of fresh bodies.  Some of the decisions that was made last several years is also questionable in my mind, Revolution Money? Really?  And he deserves to be on the board? 

[obtuse_investor]

Just as an aside, a large number of value firms have been buying or adding to AXP over Q1 and Q2. This is always promising to see.

 

http://www.dataroma.com/m/activity.php?sym=AXP&typ=a

 

Disclosure: I started a position in AXP and was still building it. I was hoping to make it bigger, but I fear my outstanding bids will expire now.

 

 

[fareastwarriors]

 

How Bad Will It Get for American Express?

 

As Costco cuts ties, Amex struggles to hang on.

 

 

http://www.bloomberg.com/features/2015-how-amex-lost-costco/

[Guest notorious546]

 

How Bad Will It Get for American Express?

 

As Costco cuts ties, Amex struggles to hang on.

 

http://www.bloomberg.com/features/2015-how-amex-lost-costco/

 

good article, thanks for the post.

 

really makes you i wonder what company's moat could be in 5 or 10 years.

[fareastwarriors]

 

http://www.wsj.com/articles/american-express-profit-drops-as-firm-ramps-up-spending-1445458850

 

See some folks here are buying. Any thoughts on the quarter or the future of AXP?

[TwoCitiesCapital]

 

http://www.wsj.com/articles/american-express-profit-drops-as-firm-ramps-up-spending-1445458850

 

See some folks here are buying. Any thoughts on the quarter or the future of AXP?

 

I've been watching it, and am interested in buying a good chunk at the right price, but I don't think we're there yet. We're pretty close to the top of the short-term credit cycle IMO and I think charge-offs and defaults will rise over the next 1-2 years. I think there might be some more negative impact on earnings/share price from that and then I'd move in to pick it up at a lower multiple on lower earnings.

 

In the grand scheme of things, I don't have any worries about AmEx. I am a customer and a huge fan of the brand/cards/customer service and they have a history of totally reinventing themselves around travel. The CostCo thing will likely be a blip on the map for them. There's tons of places for improvement, but tons of places they're doing excellently and I'd think they'll manage just fine.

 

As far as looking forward for the company:

 

1) When I think AmEx, I think travel. And they're great at it. The perks of the Centurion Lounge, travel concierge, seat and car upgrades, etc. etc. etc. are incredible.

But there is room to expand. Instead of focusing just on travel, they could start focusing more on day-to-day social events. It seems like they do a little of this with concerts and sports, but if AmEx could get me into exclusive clubs and lounges in NYC, Vegas, L.A., Miami, etc. that'd a big draw to more people my age. Also, you'd be more likely to be using your AmEx for the $500 bottle service at those places well which is a plus for them. I don't know if they'd have to build this in-house or purchase another company, like Magnus, to get it done, but that would be a huge deal in my eyes. I'm know plenty of people like myself are tired of waiting an hour in line just to be told that the half-empty club is full unless if you want to agree to table/bottle service.  It'd be a huge sell just to flash my platinum card and get in.

 

2) I wish they'd separate the branding for their lower-tier cards. I have no doubt that the brand is being diluted by giving one to everyone to use at a big-box store, or selling co-branded cards with airlines, or selling gift cards at Wal-Mart. I have no issue with those business activities, but if you're brand is built on prestige and exclusivity it is damaging.

 

 

 

 

 

[Spekulatius]

I like Amex for the extra perks provided. For example you can elect to have primary car insurance for $25 (I think) fixed fee, if you pay the rental with Amex. This is primary insurance that goes in front of your own and even works in foreign countries. Very cheap compared to buying insurance at the rental desk and equivalent in coverage.

Also, you get to double your insurance for items purchased with Amex up to two years. Very handy when buying laptops and the like. I can attest that using their perk is easy - my wife's laptop died after 22 month (manufacturers warranty got expired) no they asked for an estimated on the cost of getting it fixed and then quickly sent a check. They did not care if we actually repaired it or not.

 

They do provide great service every time I called and had an issue. I think this is one company that is truly customer centric.

[Jurgis]

2) I wish they'd separate the branding for their lower-tier cards. I have no doubt that the brand is being diluted by giving one to everyone to use at a big-box store, or selling co-branded cards with airlines, or selling gift cards at Wal-Mart. I have no issue with those business activities, but if you're brand is built on prestige and exclusivity it is damaging.

 

Right. I mentioned before that for me Amex does not mean prestige. Actually more like "does this place accept it at all" feeling.

 

Also, IIUC, some of the perks and service are not provided by Amex on cobranded cards. This might be benefit to Amex (reduces their expenses), but it also means that the glowing reviews like yours and Spekulatius' will be mixed with "I have Amex and the service sucked". E.g. I'm not even sure that extended warranty is there for cobranded card. Same with rental auto insurance.

[Viking]

My wife and I both hold Amex cards; a primary reason we got them was they were the only credit card accepted at Costco. Note, we did not have a co-branded card (Costco and Amex). We put lots of purchases on them over the years. We are in the process of cancelling them. We have Visa as our primary card. We will get a MasterCard as that is what is accepted at Costco Canada now. The problem with Amex in Canada is it is not accepted everywhere so it is subpar as a primary credit card. I am not going to carry three credit cards. I wonder if the hit to Amex is not going to be bigger than expected over the next year.

 

Costco is a crazy difficult company to do business with. However, they are VERY predictable. I called on their head office for many years. Where big companies get into difficulties with Costco is when they expect Costco to conform to 'big companies' way of doing business. This rarely happens.

[Sunrider]

My wife and I both hold Amex cards; a primary reason we got them was they were the only credit card accepted at Costco. Note, we did not have a co-branded card (Costco and Amex). We put lots of purchases on them over the years. We are in the process of cancelling them. We have Visa as our primary card. We will get a MasterCard as that is what is accepted at Costco Canada now. The problem with Amex in Canada is it is not accepted everywhere so it is subpar as a primary credit card. I am not going to carry three credit cards. I wonder if the hit to Amex is not going to be bigger than expected over the next year.

 

Costco is a crazy difficult company to do business with. However, they are VERY predictable. I called on their head office for many years. Where big companies get into difficulties with Costco is when they expect Costco to conform to 'big companies' way of doing business. This rarely happens.

 

Besides, AMEX Canada's customer service sucks £$£%@$%@$%@$£%@$£%! Originally it was better than the banks' cards but in the last year it's been increasingly hard to get someone on the phone, especially if you're travelling a lot. Opening hours from 9 - 5 in Canada don't do you much good when you're on the other side of the world. Never used to be that way.

 

And then ... well, they locked my account but didn't get in touch. Holding for an hour (from overseas) revealed that I had been put on review (why don't you just email me as I ask every damn time I speak to an agent). I sent in the documents the requested, two days later I'm on hold again for an hour to then be told that they are closing my account. Reason? "We're not obliged to give you a reason, Sir.".

 

That's a nice answer to a customer who spends a decent amount monthly and has never paid a day late. But hey, Visa and MasterCard will be happy to have another gold/platinum/whatever member.

 

So that was my really disappointing experience with Amex Canada. May they die a slow and painful death.

 

Cheers!

[kirkomi]

Frankly speaking, how difficult would it be for AMEX to let the lower end merchants pay lower fees ? Looking at the capex, AMEX far outspends both Visa and Mastercard. Visa has an average of $450M, Mastercard has $300M but Amex has $1.1B ! That is double of Visa and more than 3 times Mastercard.

 

[vinod1]

Frankly speaking, how difficult would it be for AMEX to let the lower end merchants pay lower fees ? Looking at the capex, AMEX far outspends both Visa and Mastercard. Visa has an average of $450M, Mastercard has $300M but Amex has $1.1B ! That is double of Visa and more than 3 times Mastercard.

 

1. Amex pays generous rewards and if it lowers the fees for some merchants, it has to pick up the tab. So it is not easy for Amex to lower fees. If Amex starts cutting the rewards and/or other benefits, it loses its edge over Visa/Mastercard.

 

2. V/MA have other card issuers (banks, etc) that have their own marketing. So if you add that up it would significantly exceed Amex.

 

I am long Amex though.

 

Vinod

[bookie71]

I just had a disputed charge and their system is very cumbersome. They supposedly have resolved the issue, BUT I have to wait for a letter to arrive to know the outcome.

[Jurgis]

1. Amex pays generous rewards

 

Not more generous than other credit cards.

Fido Amex is 2% cash back, but Citi has that too.

Don't know about travel rewards since I don't use them, but AFAIK Money magazine suggests other cards for travel too (and AFAIK they are pretty good in selecting the best cards).

[TwoCitiesCapital]

1. Amex pays generous rewards

 

Not more generous than other credit cards.

Fido Amex is 2% cash back, but Citi has that too.

Don't know about travel rewards since I don't use them, but AFAIK Money magazine suggests other cards for travel too (and AFAIK they are pretty good in selecting the best cards).

 

AmEx perks for the higher tier cards (gold and up) are pretty good. The rewards on the gold card, for instance, is 3x points for travel (or 4x if you book on their website), 2x points for supermarkets, and 1x points for all else BUT when you consider that AmEx points have a high conversion ratio into other loyalty programs (like those of other airlines) you can do really, really well for yourself.

 

ThePointsGuy does multiple analysis and determines the value of an average AmEx point is about $0.017 so your points are actually 5% for travel (6.8% if you book on the website), 3.5% for supermarkets, and nearly 2% for all else assuming you use/convert the points for travel. Also, there are deals at different loyalty providers to convert AmEx balances and get an even MORE favorable exchange a few times a year. Some of these have been so lucrative in the exchange rate that it ends up being the $ equivalent of having received 5-10% cash back on all purchases for the points converted. Of course, you don't get to choose what providers do what deals when, but the availability to convert in a lucrative transaction like that has to be worth something. Few other rewards programs come close for travel rewards if you put a little effort into AmEx points.

 

Of course, that's on top of $100 back in airline incidental fees, free insurance when you rent a car, and extended warranty on all purchases, access to AmEx's customer service when traveling (a life saver), etc. etc. etc.

 

The further up the scale you go in the quality of the cards, the less points you earn on purchases but the more qualitative the benefits become. The platinum cards only gets 1x the points on all purchases, BUT you get $200 in airline incidentals; complimentary access to Delta, Centurion (free food, bar, wifi), and Priority Pass lounges when traveling; free TSA Precheck or Global Entry, free upgrade in size on car rentals on top of free insurance, occasionally free upgrades in seats on flights, etc. The quality of life for the frequent traveler is greatly improved for the Platinum card user which is hard to quantify in $ terms.

 

I'm sure other travel cards are good as well. There may be even a few that can compete, but from my experience AmEx has been best in class and I won't be changing anytime soon. I use my Citi 2% cash back card and my AmEx card about 50/50.

 

[kirkomi]

2. V/MA have other card issuers (banks, etc) that have their own marketing. So if you add that up it would significantly exceed Amex.

 

Thanks. I did not think of that.

 

The Costco deal was 20% of Amex portfolio of loans. It is a pretty large chunk and this is keeping me away from the stock. I did a back-of-the-envelop calculation yesterday. Here it is :

 

The company is paying 2.34% on its debt (2014 figure) and receiving ~ 8.3% in interest on the loans it has given to the customers. So, it is earning around 5% for the service (approximately $3.5B a year with $69B loan). If this stream does not grow *at all* and at 15% discount rate this part of the business is worth approximately 3.5 * 1/(1.15-1) = $23B.

 

Looking at the income statement, the non-interest revenue - all expenses  = $5B. Again, at 15% discount rate, this stub is worth = $33B

 

And now, with $22B cash on balance sheet, I should be willing to pay ($23 + $33 + $22) B = $78B.

 

But then, the stock is not cheap anymore if 20% of the loan portfolio is gone [http://www.valuepenguin.com/2015/04/american-express-earnings-ramifications-costco-divorce].

[Nnejad]

I just had a disputed charge and their system is very cumbersome. They supposedly have resolved the issue, BUT I have to wait for a letter to arrive to know the outcome.

 

Have you actually tried anywhere else with better results?

[vinod1]

1. Amex pays generous rewards

 

Not more generous than other credit cards.

Fido Amex is 2% cash back, but Citi has that too.

Don't know about travel rewards since I don't use them, but AFAIK Money magazine suggests other cards for travel too (and AFAIK they are pretty good in selecting the best cards).

 

I am more thinking of both direct monetary rewards plus other more qualitative items like much better service and very pro consumer policies.

 

I posted this on fool board of some examples

 

- I lost a $900 camera in Rome having left it on the ground for a few seconds. The police at the site told me there is no use filing for a compliant so I did not yet. Amex paid back $900 to me after I told them about the loss. All I had to do was sign a document stating that I lost the camera as I did not have any proof of loss.

 

- One friend had a problem with an expensive furniture that was just a day old. One of the pieces was broken and they would only repair it and the furniture company would not take it back without a 30% restocking fee. He called Amex and he got the full refund.

 

- Another friend bought a refundable flight ticket on Expedia and when he cancelled it, they claimed it would take 6-8 weeks for the refund or 2 billing cycles. Several calls and escalations only led to frustration. Amex refunded the money in a day.

 

I am not sure how many others value such things but to me that makes Amex my primary card. Maybe some specific high end cards from other banks provide the same service, but I think this is more common at Amex.

 

Vinod

[TwoCitiesCapital]

1. Amex pays generous rewards

 

Not more generous than other credit cards.

Fido Amex is 2% cash back, but Citi has that too.

Don't know about travel rewards since I don't use them, but AFAIK Money magazine suggests other cards for travel too (and AFAIK they are pretty good in selecting the best cards).

 

I am more thinking of both direct monetary rewards plus other more qualitative items like much better service and very pro consumer policies.

 

I posted this on fool board of some examples

 

- I lost a $900 camera in Rome having left it on the ground for a few seconds. The police at the site told me there is no use filing for a compliant so I did not yet. Amex paid back $900 to me after I told them about the loss. All I had to do was sign a document stating that I lost the camera as I did not have any proof of loss.

 

- One friend had a problem with an expensive furniture that was just a day old. One of the pieces was broken and they would only repair it and the furniture company would not take it back without a 30% restocking fee. He called Amex and he got the full refund.

 

- Another friend bought a refundable flight ticket on Expedia and when he cancelled it, they claimed it would take 6-8 weeks for the refund or 2 billing cycles. Several calls and escalations only led to frustration. Amex refunded the money in a day.

 

I am not sure how many others value such things but to me that makes Amex my primary card. Maybe some specific high end cards from other banks provide the same service, but I think this is more common at Amex.

 

Vinod

 

To add to your list, I was on a flight out of St. Louis to NYC. There was a quick layover in Chicago. The flight out of STL was delayed and it looked like I would probably miss my connection in Chicago by 10-15 minutes. I went to the help desk for the airline and talked with the representative there. After typing on her computer for 30 seconds, she said there was nothing they could do about rebooking me on another flight and that they would not hold the plane in Chicago. Basically, my options were to stay in STL for the night or to stay in Chicago for the night but there was now way I was getting to NYC.

 

I called AmEx and within 5 minutes they had me rebooked on another flight to NYC out of Chicago. The kicker - it was the same airline where the representative told me there was nothing they could do. That day is the day I became a huge fan of AmEx and decided that the fee was totally worth it if I could expect to receive that kind of service.

[boilermaker75]

We got a notice yesterday that we could now use our AXP card at Sam's Club.

 

https://www.americanexpress.com/us/content/sams-club/

[Pauly]

I'm not sure about the stock. But you guys have just about convinced me to get an AmEx card...