American Express ended its co-branding agreement with Costco earlier this month.
Wall Street analysts were disappointed at the loss of the deal, which was followed by more bad news for the company, including a rate hike on over 1 million cards and the loss of an antitrust lawsuit.
But on Wednesday, Deutsche Bank gave the credit card company a vote of confidence, upgrading the stock to “Buy” from “Hold.”
In spite of the losses that American Express is anticipating, these are some of the reasons why Deutsche Bank is recommending the company to investors:
- American Express management overestimated the impact that the Costco deal loss will have on its profits, at around $US0.75 of 2016 earnings per share, compared to Deutsche Bank’s $US0.60 forecast. The company could generate additional card balances if it is able to keep up to half of its non-Costco clients. Also, “replacement AMEX cards for current Costco cardholders will likely include attractive revolving features (and balance transfer promos) and AXP should be able to pre-approve most existing Costco cardholders (given long credit histories),” Deutsche Bank’s David Ho wrote.
- The Annual Percentage Rate hike on up to a million cards could also help the company’s bottom-line. “Each 250bps rate increase on each $US2B of balances adds about $US0.03 to EPS (or ~1%) — assuming 100% realisation,” Ho wrote.
- Costco probably won’t accept American Express cards for its new co-branding agreement. Even though this is a $US35 billion annual loss, the current discount rates are likely smaller when customers use the cards in Costco than when they use them elsewhere, according to Deutsche Bank.
On the flipside, the aftershock of the credit crisis is still being felt across the industry, and the company still risks losing more co-branding partnerships.
Year-to-date, AmEx shares are down more than 10%, but in afternoon trade on Thursday the stock was up 1.8% to around $US83 per share. Deutsche Bank has a $US90 price target on shares.