The stock of American Express Co. AXP has declined by nearly 5% year to date. This credit payment card products provider also slogged in 2015 and lost 25% of its stock value in that year. Though the decline in share price is lesser this year than the last one, the stock could not gain sufficiently from the growth initiatives taken to improve profitability.
Fundamental Problems at American Express
The company’s earnings and consequently its share price have been dragged down by bearish sentiments owing to the loss of its contract with retail prime, Costco Wholesale Corp. The contract termination, which was disclosed last year, prompted the company to spend heavily on growth initiatives to counter the loss. Increased expenditure on growth initiatives hurt the company’s bottom line. The company expects marketing and promotion expenses during 2016 will be at least $200 million above the 2015 level of $3.1 billion.
Restructuring charges related to the company’s ongoing cost-reduction efforts have also dented its earnings. The insurer is aggressively moving ahead with plans to take $1 billion out of its cost base by the end of 2017.
Also, the company remains exposed to challenges associated with continued modifications in the payments’ industry. Alternative payment methods like mobile technologies also threaten growth. Moreover, players like MasterCard Inc. MA and Visa Inc. V pose stiff competition.
American Express faces stringent regulatory control due to its status as a bank holding company. The Department of Justice ruled against American Express in a suit that challenged the company's rules that allow merchants to promote other cards as anticompetitive. Although American Express has appealed against the decision, the process could take considerable time. If the company loses the appeal, its payment market share and transaction fees might be severely affected.
American Express has been bearing the burnt of an appreciating dollar since 2015. The stronger dollar had an adverse impact on the company’s cross border revenues and reduced earnings per share by about 3–4% in 2015. This year too, the insurer continued to see the impact of a lower merchant discount rate and a strong U.S. dollar on its international operations. Apart from currency woes, the price of oil and its impact on airfare and gasoline prices created a drag oncharge volume, which compressed the top line.
Its U.K. business, which constitutes 3–4% of global billings and has been growing in excess of 10% in recent quarters, saw noticeable slowdown in growth for several days immediately after Brexit.
At the start of the year, the company announced certain steps to boost profitability. These included management reshuffling, simplifying processes across businesses and reduction in expenses. The company also passed the Federal Reserve’s annual stress test in June, which indicates that it possesses adequate capital and that its capital structure is stable under various stress-test scenarios.
Though the company has making efforts to bounce back, we believe the prevailing headwinds will the stock under pressure.
American Express carries a Zacks Rank # 3 (Hold). A better ranked stock in this space is Euronet Worldwide Inc EEFT. This stock carries a Zacks Rank # 2 (Buy).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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