American Express is under pressure because of one big problem: it's being copied by the competition

American Express is under pressure.

In a note Tuesday, Oppenheimer took a long look at the company and concluded that while the recent bad news might appear to be just a series of “one offs,” there are deeper problems at the company AmEx might struggle to overcome.

Here’s Oppenheimer:

“The key in our minds on whether to recommend or downgrade rests on the competitive environment and its implications for future profitability of the underlying core businesses. After an extensive review of what we would characterise as AXP’s core businesses, we would argue that post crisis the competition is much more intense and that the profitability of the core drivers is likely under pressure.

In its note, Oppenheimer downgraded American Express to “Underperform” and put a price target of $US68 on shares. AmEx shares fell by over 1% in early trading to around $US78.69.

Oppenheimer highlighted five main reasons why it downgraded the stock; the first bullet is the big one:

  • American Express’ competition has gone from envying the company before the financial crisis to doing everything to copy its success post-crisis by focusing on four things: 1) spend-centric consumers; 2) corporate-card holders; 3) partnership/rewards; and 4) Business Travel.
  • Before the crisis, American Express generated around $US7 (versus $US2 industrywide) in spending for every $US1 of loans. But the competition is closing in, with JPMorgan Chase at $US4. “Intensified competition likely continues to drive up acquisition costs/reduce profitability.”
  • Profitability per card is either declining or has peaked in its various business segments.
  • The company’s sale of its Global Business Travel division and Concur Technologies helped make around $US0.6 billion in reinvestments possible. Still, there’s already been a ton of reinvestment post-crisis, compared to before 2008.
  • Relative to other large-cap financials, American Express is trading at a premium that’s just “too much,” particularly in a “declining profitability environment.”

Oppenheimer added:

“We believe there are structural headwinds for AXP’s ROEs going forward and that consensus estimates need to come down. Thus, even if the company gets back towards 12-15% EPS growth the heavy lifting will largely have to come from share buybacks rather than operating earnings (our 2017 EPS growth of 12% is driven by roughly 50/50 operating earnings growth vs. buybacks). Because of this we think that the multiple will be under pressure and the stock will underperform peers.”

Shares of American Express are down nearly 14% year-to-date following the loss of its Costco co-branding agreement, an antitrust verdict against the company, and earnings that were whacked by the strong dollar.

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