AmEx Slumps as Investors Search in Vain for Earnings 'Spark'
This article, originally published at 5:36 p.m. on Wednesday, July 20, 2016, has been updated throughout with comments from analysts and executives.
Initially, American Express (AXP) - Get Report jumped after beating Wall Street's quarterly profit estimates, but the rally has disintegrated over the past day as investors reviewed the credit card company's performance and decided it was just more of the same.
"They are using cost cutting and share buybacks to post good earnings numbers," Kyle Sanders, an Edward Jones analyst, said in a phone interview. "There's not really any catalyst to spark this business, and it's hard to get excited about it at this point."
New York-based AmEx fell 1.5% to $63.50 Thursday despite the 37% climb in second-quarter net income, which reached $2.02 billion and was boosted by a $1.1 billion gain from the sale of the Costco (COST) - Get Report branded-card portfolio to Citigroup (C) - Get Reportin June.
Sanders, who has a "sell" rating on the company, predicted "considerable earnings pressure" in the remainder of the year and said customer spending volume is likely to lag that of AmEx rivals.
"Growth did slow sequentially versus the first quarter due primarily to the sales of the Costco and JetBlue co-brand portfolios, as well as the continued drop-off in Costco loans prior to the portfolio sale," Jeffrey Campbell, AmEx CFO, said on an earnings call.
The company said it hopes to retain 20% of the Costco co-branded card members spending outside of the store.
Adjusted earnings of $2.26 a share for the three months through June compared with the $1.97 average of estimates in a Bloomberg survey, and the company reaffirmed its full-year forecast for earnings of as much as $5.70 a share, saying it will likely be higher than expected.
Total costs fell 15% to $4.8 billion, as Chenault works to boost returns after warehouse retailer Costco transferred its lucrative branded-card agreement to Citigroup and partner Visa (V) - Get Report . The credit card company's stock has fallen almost 8% this year amid struggles with the loss of the Costco deal and other key partnerships, pending litigation, and increased competition.
Revenue dropped 1% to $8.2 billion, American Express said. That trailed the $8.46 billion projection from analysts surveyed by Bloomberg. Still, excluding the effect of negative foreign-exchange rates, revenue was 1% higher.
The company's outlook is further clouded by an antitrust case. It's appealing a government claim that it and competitors Visa and MasterCard (MA) - Get Report required merchants to sign anti-competitive agreements that prevented them from moving customers to cheaper forms of payment.
"Despite the heightened level of investment over the last several quarters, revenue growth has yet to see a real acceleration, though forward indicators such as account growth and billed business are encouraging," Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods, wrote in a note. He rates the stock "market perform," the equivalent of neutral.
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"If American Express were to lose the appeal, we believe that it could be damaging to the company's payment market share and, potentially, transaction fees," Sanders wrote in a note to clients. Merchants have long complained that the discount rate, the industry term for the percentage AmEx charges stores to process card payments, is too high.
The company isn't alone in facing competitive challenges, however. Rival Discover (DFS) - Get Report, which released its second-quarter earnings on Tuesday, reported higher expenses for reward programs designed to spur customer spending.
Still, AmEx, Discover and competitors Ally Financial (ALLY) - Get Report and Capital One (COF) - Get Reportwere among 30 bank holding companies with more than $50 billion in assets that passed the Federal Reserve's 2016 annual stress tests in June, enabling them to return more capital to their investors.
American Express subsequently boosted its quarterly dividend by 10% to 32 cents a share and announced share buybacks of $3.3 billion through the second quarter of 2017, the company said.
Sanders said that the third quarter will provide more "viability" into AmEx's business without Costco, which will be an "inflection point" for the company's shares.
"AmEx's core drivers are spending-volume growth and the discount rate, and the company continues to struggle on both fronts," Sanders said in a note. "We think investors will see through the shiny headline earnings-per-share number and recognize that AmEx's core metrics remain challenged."