What: Shares of credit and charge powerhouse American Express (NYSE:AXP) took it on the chin for a second consecutive day on Friday, losing $2.40 to close at $78.08 and briefly touching an intraday 52-week low. The move lower was primarily a hangover from the announcement about Costco (NASDAQ:COST) the day prior, but was also due to a quartet of price target reductions from Wall Street.
So what: Last Thursday, Costco announced that it would be ending its exclusive partnership with American Express at the end of March 2016 because of AmEx's high transaction costs, sparking a negative reaction from investors that carried over into Friday.
Wall Street analysts also took to drubbing AmEx, considering that its revenue and EPS are likely to be negatively affected by the loss of the exclusivity agreement. Four firms cut their price targets on AmEx, including:
- FBR Capital, from $92 to $87
- RBC Capital Markets, from $79 to $74
- Barclays, from $96 to $85
- Argus, from $97 to $92
Ratings from all four firms remained the same, with Argus rating AmEx a buy, FBR Capital and Barclays the equivalent of a hold, and RBC Capital the equivalent of a sell.
As Barclays' covering analyst Mark DeVries summarized in a note to investors, Costco's U.S. business accounted for about 8% of American Express' total billed business in 2014, and Costco also comprised about one-fifth of its loans and about one-tenth of total global cards in force. DeVries cut his firm's 2015 full-year EPS estimate to $5.48 from $6.03 and chopped AmEx's 2016 full-year EPS estimate to $5.56 from $6.46 on the expectation that it'll need to spend more freely in order to attract consumers.
Now what: The question that Wall Street and investors need to get to the bottom of is whether or not American Express is really in as bad a shape as these price target cuts make it appear.
American Express' recent quarterly results already showed a rapid rise in expenses and the need to cut jobs in order to control costs. A raise in expenses in the U.S. could be an indication that competition for higher-income customers is heating up and AmEx is having to spend more to retain and recruit new cardholders.
The end of this 16-year partnership with Costco could also signal the beginning of a transition period for AmEx. As a partnered card that targets more affluent consumers, it's charged a higher rate to merchants than rivals Visa or MasterCard. The end of its partnership with Costco may force AmEx to make its merchant rates more competitive.
In the meantime, AmEx is probably looking at a difficult growth environment. But, the U.S. economy is healthy, consumers are spending, and AmEx has a strong brand name. Though AmEx stock may be looking more volatile than normal, I do believe that it offers value to long-term-minded investors.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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