AXP - American Express

[merkhet]

I'm increasingly starting to think that Visa is becoming an irrational player in this oligopoly structure.

 

Could you elaborate on that thought?

 

The comments on the AMEX conference calls is that Costco wanted a deal that was uneconomic for American Express. However, Visa was willing to take it. There were similar comments from Ajay Banga on the MasterCard conference call about USAA. Now, maybe that's CYA from each of them. It's certainly possible. On the other hand, maybe it's a replay of Coke & Pepsi during the dark times when they decided to go after market share at all costs.

 

It wasn't Visa who made the decision to bid for the Costo deal, it was Citi. Some of the card-issuing companies have been irrational in bidding for fairly low return business, which has really amounted to enlarging their asset base. It's reflective of the low return environment today, especially for banks.

 

That's a good point, Frank. I should have been more precise in separating out the networks from the issuers. Irrationality on the part of the issuers is not immediately problematic for the networks (except for American Express, which is a closed network).

 

However, I have to also wonder to what extent it hurts someone like MasterCard who now has to spend a lot of money trying to wean back business, like USAA, and whether or not it sparks irrational levels of competition for issuers.

[krazeenyc]

JPM Chase and Citi have both been aggressively building out a portfolio of premium credit card offerings (See Chase's Sapphire Preferred, Citi's AA Executive Card and Citi's Prestige Thank You card.  They have enticing customers with very healthy (expensive) sign up bonuses. This is what worries me most going forward about owning AMEX.

 

The Fidelity Amex was a money loser for Fidelity over the years -- but I guess it was a nice perk or relationship builder. One reason the card did "ok" was it offered very stingy sign on bonuses. 

[lincolnc]

Regarding the Chinese purchaser of art.

 

Easier to swipe a card than pay in cash.  Currency controls at the time (and still) make it nearly impossible to take that much money out of China....

[Jurgis]

I got a rather cryptic Fido message about the card replacement process. Since I don't care much, I did not dig into the details. It appears that there will be "mandatory" replacement of the card sometime later this year.

[CorpRaider]

Yeah sounds like they're going to just send us the new card.  I'm good with that.  Not sure Costco is going to do the same. 

 

So the narrative is that Chenault is the only dude displaying price discipline and that is why they are losing these deals?  I thought perhaps he was kicking his biggest clients in the junk at the beginning of all meetings or something.

[TwoCitiesCapital]

Yeah sounds like they're going to just send us the new card.  I'm good with that.  Not sure Costco is going to do the same. 

 

So the narrative is that Chenault is the only dude displaying price discipline and that is why they are losing these deals?  I thought perhaps he was kicking his biggest clients in the junk at the beginning of all meetings or something.

 

Hahaha.

 

I was talking to an employee of AmEx recently who helps organize some of these partnerships. I was asking why they hadn't moved into certain areas and he says they have a return target of 20-25% when they do a deal (can't remember if that was ROE or ROI). He said that they've considered A LOT of partnerships, but if it doesn't generate close to that target they don't go for it.

 

It's not surprising to me see them losing these partnership deal from partners who want to pay less going to other card companies willing to accept far less economic terms. I think the real question is how much is the core-loyal AmEx cardholder base worth and then how much should we tack on for these auxiliary relationships that can be fleeting.

[krazeenyc]

Yeah sounds like they're going to just send us the new card.  I'm good with that.  Not sure Costco is going to do the same. 

 

So the narrative is that Chenault is the only dude displaying price discipline and that is why they are losing these deals?  I thought perhaps he was kicking his biggest clients in the junk at the beginning of all meetings or something.

 

Hahaha.

 

I was talking to an employee of AmEx recently who helps organize some of these partnerships. I was asking why they hadn't moved into certain areas and he says they have a return target of 20-25% when they do a deal (can't remember if that was ROE or ROI). He said that they've considered A LOT of partnerships, but if it doesn't generate close to that target they don't go for it.

 

It's not surprising to me see them losing these partnership deal from partners who want to pay less going to other card companies willing to accept far less economic terms. I think the real question is how much is the core-loyal AmEx cardholder base worth and then how much should we tack on for these auxiliary relationships that can be fleeting.

 

The Costco deal specifically is unique because of its size. Let's put that one aside for now.  If you look at the other partnerships -- Jetblue, Fidelity, SPG, etc, -- individually no one deal is that big of a deal.  But their ability to sign deals of similar quality going forward that offer them a reasonable return is crucial. That's the worry -- if Visa, JPM, Citi, etc. are willing to strike deals at much lower returns that's definitely going to hurt Amex. Remember even the core Membership Rewards program depends on "partners". 

 

 

[bookie71]

Isn't the big earnings factor for the credit card companies the folks who don't pay their bill off and pay the usurious interest rates?  In the old days we thought 18% was high and now many charge over 30%

[rkbabang]

Isn't the big earnings factor for the credit card companies the folks who don't pay their bill off and pay the usurious interest rates?  In the old days we thought 18% was high and now many charge over 30%

 

Yes credit cards are such an awful deal if you actually use them as credit.  I really can't believe that people actually do.  I never paid interest on credit cards even when I was young and broke. I saved up for things then bought them when I could.  I don't even know or care what the interest rates on my cards are.  They could go up to 80% or 800% for all I care.

 

[TwoCitiesCapital]

Isn't the big earnings factor for the credit card companies the folks who don't pay their bill off and pay the usurious interest rates?  In the old days we thought 18% was high and now many charge over 30%

 

The majority of AmEx customers are "charge card" holders who pay their balance in full each month. AmEx has been experimenting with rolling over balances with interest in recent years, but the majority of their money comes from higher transaction fees charged on higher dollar transaction volume plus the annual charges they get for a card. It seemed to be a winning formula if you look at their profit per card relative to other companies.

 

Consider that the average transaction on an AmEx is 3x that of a MasterCard holder and 2.5x that of a Visa holder - on top of that they get about 100 bps more on transaction fees. 2-3x the volume with a 30-50% pricing premium means they make A LOT more money per card than their competitors even without interest. They also save on expenses by operating the entire transaction network themselves and have a huge revenue bump from their annual fees. On a per card basis, it's hard to imagine how the other cardholders could even come close to profit per card without multiplying their volume of swipes by 3-4x.

 

 

Also, saw this today.

http://www.bloomberg.com/news/articles/2016-01-20/amex-chief-dismantles-his-laboratory-for-serving-not-so-wealthy

 

My initial reaction to this is positive, but at the same time I'm not so sure after my discussions with the AmEx employee. If they really do target a 20-25% profit, then they must have thought this had the potential to be lucrative. Also, not everything is what it seems. The employee had mentioned they had considered getting into student loans. I was in disbelief and asked why they would ever do that. His response was, "If a cardmember adds a college age child to his/her account when they go off to college, hasn't American Express provided them with an unsecured student loan?" So it seems I've been thinking about this the wrong way, but I'm still skeptical that they couldn't have rebranded these less prestigious offerings.

 

Who knows?!?! I'm still waiting for the lower income from decreased partnership revenue and higher charge offs to kick in before really establishing a position.

 

 

 

 

 

[TwoCitiesCapital]

http://finance.yahoo.com/news/american-express-profit-falls-213455460.html

 

Earnings are out.

[Spekulatius]

http://finance.yahoo.com/news/american-express-profit-falls-213455460.html

 

Earnings are out.

 

Amex seems desperate to me. Raising fees, while they are already at the very high end in terms of fees, high hurdles of return that makes them to shed business (as another poster noted) and drastic expense cuts. I think Amex needs to have a drastic reset of earnings expectations.

 

All the above is just milking to get strong return numbers and they reached the end of the rope, imo.

[TwoCitiesCapital]

http://finance.yahoo.com/news/american-express-profit-falls-213455460.html

 

Earnings are out.

 

Amex seems desperate to me. Raising fees, while they are already at the very high end in terms of fees, hig hurdles if return that makes them to shed business (as another poster noted) and drastic expense cuts. I think Amex needs to have a drastic reset of earnings expectations.

 

All the above is just milking to get strong return numbers and they reached the end of the rope, imo.

 

I'm guessing the market agrees with you. I was not expecting a 10% decline at all but am glad to see it. The more it falls, the closer and closer I get to beginning a position. It's still too early/high for me at this point given my bearish views on the economy/U.S. equities as well as the uncertain path forward for them, but it's certainly near the top of my lists of things to buy. I'd like to see it in the high-40s before I start accumulating.

[fareastwarriors]

David Faber reported on CNBC just reported ValueAct got out of AXP back in November.

no links yet just saw it on tv

[Viking]

If you look at the carnage being done to the stock and market cap of AMEX the loss of the Costco business certainly is a head scratcher.

[vinod1]

I can understand the near term hit to earnings but not seeing anything that impacts Amex long term earnings.

 

Increased my position.

 

Vinod

[Guest neiljgsingh]

Sorry if this has been covered already; just getting up-to-speed on what's caused AXP to get screwed so badly.

 

Has management said anything about how they propose to make up for the lost Costco revenue? Or frankly any of the other contracts they've lost? Obviously increasing fees and cutting costs are not things they can do ad infinitum. And anything about how they propose to compete with MA and V and the fantastic banks they're teaming up with?

[HJ]

Valuation metrics is certainly cheap against any time in its history.  The question though, is longer term where's it going vs. the consortion of banks and V/MA, cause if co-branded card is where Amex is going to earn a living, the banks and V/MA has a cost advantage almost every time those relationships come up for renewal.  The banks have better funding structure than Amex, and V/MA charge lower interchange fees.  The Costco episode just taught us that in the end, those customers belonged to Costco, not Amex.  If co-branding is not where it will fight its battle, then what does it do to keep its market position? 

 

This is a special company that got to where it is in a very unique way.  The legacy of its brand may yet buy it enough time to figure it out in the market place.  At this moment though, it feels like the company is facing an existential moment.  It needs a Mark Zuckerberg at the helm.  Simply hanging out with Sheryl Sandberg, or buying a Steve Cases company is not giving the market enough confidence in where the company is headed against the competition. 

[TwoCitiesCapital]

Valuation metrics is certainly cheap against any time in its history.  The question though, is longer term where's it going vs. the consortion of banks and V/MA, cause if co-branded card is where Amex is going to earn a living, the banks and V/MA has a cost advantage almost every time those relationships come up for renewal.  The banks have better funding structure than Amex, and V/MA charge lower interchange fees.  The Costco episode just taught us that in the end, those customers belonged to Costco, not Amex.  If co-branding is not where it will fight its battle, then what does it do to keep its market position? 

 

This is a special company that got to where it is in a very unique way.  The legacy of its brand may yet buy it enough time to figure it out in the market place.  At this moment though, it feels like the company is facing an existential moment.  It needs a Mark Zuckerberg at the helm.  Simply hanging out with Sheryl Sandberg, or buying a Steve Cases company is not giving the market enough confidence in where the company is headed against the competition.

 

AmEx needs to find a way to make the information it has available at its disposal from directly facing the customers (transaction history/trends, personalization, credit score, etc.) valuable to their partners to justify the higher expenses or it needs to find a way to make itself indispensable to consumers. The latter has been it's bread and butter, but it's been attacked on all sides by direct competitors and by losing benefits from partners like airlines and hotels. Now it's losing less material partnerships, but it's still revenue/profit and it does seem like it's a trend.

 

I have no doubt AmEx survives this. The question is what they'll look like and how profitable they'll be coming out of it.

[jgyetzer]

It appears cards-in-force still increased year to year and customer spend was stable despite currency issues.  Customer deposits and cash are rising and debt decreasing despite returning >100% of earnings in 2015. Fundamentally I think those are more crucial than who the current co-brand partners are which are bound to fluctuate especially if AXP is demanding 25% ROE.

 

Also note average fee on a per card basis has decreased since q4 2014.

 

Probably not a crumbling company after all.

[HJ]

It's not about survival or crumbling.  They have a book of business, and earn great return on it.  At 2.5x book, the market isn't saying it's going out of business either.  The question though, is whether they are growing their business, extending their moat, or losing it, and living on buy backs to make earnings (IBM?).  If it can do the former, then it's absolutely cheap.  Today, even yesterday's metric is cheap by any measure in its own historical context.  Card in force is supposed to be growing.  I don't know of a single player who didn't grow that number this past year.  Deposits and cash is just how it finances itself.  That growth is mending a deficiency in its funding model.  Nobody's going to argue that this deposit franchise, at the scale it is, however fast growing, has a big impact on the long term franchise value of American Express.   

 

The market is simply not buying this narrative, and I can't find strong evidence to disagree .   

 

[HJ]

 

AmEx needs to find a way to make the information it has available at its disposal from directly facing the customers (transaction history/trends, personalization, credit score, etc.) valuable to their partners to justify the higher expenses or it needs to find a way to make itself indispensable to consumers. The latter has been it's bread and butter, but it's been attacked on all sides by direct competitors and by losing benefits from partners like airlines and hotels. Now it's losing less material partnerships, but it's still revenue/profit and it does seem like it's a trend.

 

I have no doubt AmEx survives this. The question is what they'll look like and how profitable they'll be coming out of it.

 

You are likely right, and that's what I mean by an "existential moment".  The way Bill Gross figured out everything at Microsoft should integrate internet explorer, Disney deciding to buy Pixar just to bring Steve Jobs on board, or even in its own corporate history, when Ralph Reed figured out the company is a financial company, no longer a travel agency. 

 

But I don't see the company doing it.  I see ADS doing some version of it, Facebook putting a payment function on its site, no doubt with every intention of figuring this out, Apple Pay, Google Pay putting additional distance between the card issuer and the consumer.  What I see the company do is funding Square (good), buying Revolution Money (bad), and putting the Revolution Money guy on his board (worse).  Look at the make up of the board.  There is not a single DNA on that board that I see capable of guiding the company when it needs to figure out what the company will be for the next generation.  If you read that Bloomberg article about how AXP lost the Costco business, Chenault doesn't look the guy you want at this moment.

 

I very much want the company to succeed, with its storied history, and if anything, just to reassert Buffet's brilliance.  But I just feel that the company has lost its ways, and is languishing, which is a pity for such a great franchise, trading like a marginally above average bank.

[vinod1]

Partnership business is profitable and allows Amex to grow earnings nicely along with their partner and from their operating leverage. But it is tangential to the moat. Customers belong to the partner - the benefits are prominently given by the partner e.g. costco cash rebate or bonus, Airline/Hotel points, etc. When the agreements come up for renewal 5 to 10 years, Amex has to compete again for the same business by offering more incentives to the partner. Sure it is profitable and is a high ROE business due to operating leverage but it does nothing to the core Amex moat. It is nowhere as important as direct Amex customers.

 

A clue to Amex position, is to look at what JP Morgan Chase has done with ChaseNet. Dimon strong armed Visa to essentially rent the Visa Network for 10 years to build exactly what Amex has - a closed loop network. The rationale for ChaseNet is a strong endorsement for Amex and a very worthwhile competitor as well.

 

There are lots of other risks to consider but as far as moat is concerned Costco or the partnership deals would not be in my top 5 concerns.

 

Vinod

[TheAiGuy]

(...) Disney deciding to buy Pixar just to bring Steve Jobs on board (...)

 

Disney bought Pixar b/c Pixar was kicking its ass. The Pixar exec's (not Jobs) then proceeded to fix Disney animation.

[jtvalue]

Let's look at hard numbers and facts here. In 2015, billed business grew 6% on a constant currency basis to $1.03 trillion, cards in force grew 5% to 117.8 mil, loans ex Costco grew 10% y/y, and at the same time the company bought back 5% of their stock, earned a 24% ROE, and returned 105% of net income to shareholders. An amazing fact, since 2007 billed business has grown 60% but operating expenses are flat. Hardly the numbers of a dying business

 

The Costco contract was 8% of billed business but the fees were much lower. Selling the Costco loan book which represents 20% of their portfolio makes them even more spend centric, freeing up capital and should result in a higher multiple. The stock currently trades at less than 10x both their 2016 and 2017 earnings guidance. If they can grow EPS 6% a year (long term average for S&P 500 companies) and the stock returns anywhere near its 25-year average PE multiple of 17x this will be a home run. I truly believe they can return to 6% rev growth, 3% expense growth, and 12% EPS growth with buy backs in 2018 when the Costco contract is fully lapped

 

It's one of the best long-term individual stock opportunities I've seen since the financial crisis and I've backed up the truck. I can't help but see similarities between the Costco contract and the salad oil scandal