It's going to be a rough ride for American Express (NYSE:AXP). The fourth quarter earnings report says it all.
On Thursday, the company reported that it earned $5.05 per diluted share for the full 2015 year. It also guided for $5.40 to $5.70 in earnings per share in 2016, with "at least" $5.60 in earnings per share in 2017.
Nevermind that the company actually used the words "at least" to describe its 2017 guidance, we'll get to the intricacies of the guidance later.
At first glance, these numbers don't seem all that optimistic. Then you think about what's actually going on at American Express.
It's losing its deals with Costco and JetBlue this year. Costco alone makes up roughly 20% of its loan book. The rising U.S. dollar also continues to pressure foreign earnings.
It's also laying off employees (again!) with the goal to save $1 billion a year. And the restructuring initiatives are essentially designed to paper over the company's overconfidence about its non-Costco business lines, based on my interpretation of Amex CEO Ken Chenault's response to an analyst on the conference call.
Let's go back to the guidance of $5.40 to $5.70 of earnings per diluted share in 2016. While we have restructuring plans on our minds, note that any charges related to its cost-cutting efforts aren't included in its 2016 earnings guidance. Its actual earnings for 2016 will likely be much lower than the guidance of $5.40 to $5.70 per share.
But there's yet another massive variable that is easily forgotten: American Express should have a huge one-time gain from the sale of its Costco card business in 2016. The company disclosed on its conference call that it expects to book a gain of about $1 billion on the sale of its $13.8 billion loan book, which amounts to a premium of about 7.2%.
The premium works out to about $650 million after taxes, which amounts to roughly $0.66 per diluted share. Subtract this from the guidance of $5.40 to $5.70 and you get about $4.74 to $5.04 in "recurring" or "adjusted" earnings per diluted share for 2016. (Another way to think about this is that roughly 12% of 2016 earnings guidance comes from the sale of the Costco portfolio.)
That implies that American Express expects its earnings per share to shrink by 0-6% next year at the top to bottom of the range before any of the many charges it will likely take for its restructuring initiatives, and excluding the one-time gain from the sale of its Costco portfolio.
And if you prefer we compare apples to apples, adjusted earnings to adjusted earnings, you get a decline in adjusted diluted EPS of 6% to 12% from the full year 2015 to full year 2016. Based on the conference call, its my interpretation that this guidance includes some level of cost savings in 2016.
As you go through the numbers, you begin to realize that there are many more ways for Amex to miss guidance than beat it.
In the best case you get a stock that's trading for about 12 times earnings expectations with a big pile of execution risks on top. Key concerns: Can Amex meaningfully cut expenses after years of cost cuts? Can it continue to collect above-average fees on every swipe? Will the recently reversed-in-Amex's-favor DoJ decision actually hold up?
More importantly, are you being fairly compensated for all these risks at 12 times forward earnings guidance? I think not.