For American Express, 'everything is moving in the wrong direction'

On Thursday, American Express announced that in March 2016, it will end its agreement with Costco to offer co-branded AmEx/Costco credit cards.

And Wall Street analysts are not excited about the non-deal.

Oppenheimer had a quick four-point breakdown of what the end of this deal means for American Express. And basically, it’s a total bummer:

  • American Express’ profit & loss is getting hit from all sides: Our takeaway as we look into 2015/2016 is that everything is moving in the wrong direction: revenues are under pressure; expenses are rising; and provisions are more likely to rise than fall.
  • Earnings volatility will increase: In 2014, the Costco relationship represented 20% of worldwide loans (~14 billion at year-end), 8% of billed business (~$US80 billion), 10% of cards in force (~11 million). It’s clearly a big loss and as it winds down there will likely be increased lumpiness/uncertainty in the results.
  • AmEx now plans to ramp up marketing to retain some of the business: Of the Costco card spending, 70% was outside of Costco locations.
  • Bottom line: American Express is a fantastic company in our view, and we have no doubt that it will work its way through these headwinds over time. With that said we are taking down our estimates on the reduced outlook after the Costco loss, and think it will be difficult for the stock to outperform with the fundamentals under pressure for the next 12-18 months.

In a note to clients on Thursday after the news, analysts at Credit Suisse added:

“We believe approximately $US90Bn (or 9% of Amex’s worldwide spend) is associated with Costco US, either within the retailer’s stores or on Costco cobranded cards. Additionally, we estimate that over $US14Bn (or 20% of Amex’s worldwide loans) are related to Costco, which we believe will be sold to the new issuer.”

The firm, which cut its price target on American Express shares to $US78 following the news, added that a future co-branding deal with Costco could be a big win for someone else.

Analysts at Jefferies wrote that:

“We believe the fact that Costco did not renew is evidence of the changing dynamics of co-branded relationships and an increasingly competitive environment … We continue to stay on the sidelines on AXP as we believe top-line headwinds are likely to persist.”

On Friday, shares of American Express were down more than 3% after losing more than 6% on Thursday.

So, just a terrible two days for one of the biggest companies in America.

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