NEW YORK (TheStreet) -- Shares of American Express Co. (AXP - Get Report) are extending losses in pre-market trading today, down 0.77% to $79.86, as Bank of America/Merrill Lynch downgrades the company to "underperform" from "buy" and slashes its price target to $78 from $109.
"We are downgrading as a noticeably lower EPS outlook and lack of visible growth will likely restrain the upside in the stock, in our opinion. Our price target implies about 3% downside potential on top of the 6.5% slide witnessed yesterday, as the overhang from the terminated Costco Wholesale (COST) partnership and sundry other headwinds will likely constrain valuation," Bank of America/Merrill Lynch said.
Bank of America/Merrill Lynch analysts think the New York, NY-based global services company chose to "reset" market expectations for its near-term growth prospects on the Costco news, as it appears the other headwinds were already weighing on American Express' outlook and it wanted to get the "bad" news largely behind it.
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However, the market will likely wait for visible signs that growth is improving before a more normal valuation is assigned to its shares, analysts concluded.
Several other analysts took action today following yesterday's news and ensuing stock price plunge. Jefferies lowered its price target to $85 from $95. Credit Suisse's target came down to $78 from $83. JP Morgan and Oppenheimer cut their 2015 and 2016 estimates. The latter lowered its 2015 estimates to $5.42 from $5.75 and 2016 estimates to $5.65 from $6.50.
As American Express and Costco end their 16-year relationship, the Wall Street Journal says this will trigger a major upheaval in the card industry.
Separately, TheStreet Ratings team rates AMERICAN EXPRESS CO as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate AMERICAN EXPRESS CO (AXP) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its growth in earnings per share, notable return on equity and increase in net income. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- AMERICAN EXPRESS CO has improved earnings per share by 14.9% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AMERICAN EXPRESS CO increased its bottom line by earning $5.55 versus $4.88 in the prior year. This year, the market expects an improvement in earnings ($6.00 versus $5.55).
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. When compared to other companies in the Consumer Finance industry and the overall market, AMERICAN EXPRESS CO's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- The net income growth from the same quarter one year ago has exceeded that of the Consumer Finance industry average, but is less than that of the S&P 500. The net income increased by 10.6% when compared to the same quarter one year prior, going from $1,308.00 million to $1,447.00 million.
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 7.3%. Since the same quarter one year prior, revenues slightly dropped by 2.4%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- In its most recent trading session, AXP has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, the stock's rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that the other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: AXP Ratings Report