American Express: To Buy or Not to Buy? (Part 1)

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AMEX image. Source: Google

I use this blog (occasionally) to further enhance my skills in balancing my investment decision about a certain company.

In this case, I landed on American Express (AMEX). American Express trades on nine different foreign exchanges with one of them in the NYSE-ticker AXP.

AMEX had been on the hot seat lately-well since earlier this year when COSTCO (a big box retailer) decided not to exclusively accept AMEX for its transactions.

First event: COSTCO divorcing AMEX (by March 2016-probably)

It appears that most AMEX shareholders dump their shares upon news received during that time.

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AMEX shares. Source: Google.

So what’s at stake with this divorce after a 16-year exclusive relationship?

According to a WSJ article, 1 in every 10 AMEX card is a Costco card holder. Assuming that ALL of AMEX’s revenue comes from its card business. 1/10 is 10%. So 10% of its revenue would be at least reduced to a certain point–of course unless AMEX would be able to grow its top line as well as carry it over to its bottom line so as to negate this unfortunate happening, then I think my assumptions are JUST as very much CONSERVATIVE as it can be.

Previous year (2014), AMEX was able to garner 34,292 USD million of revenue and 5,885 USD Million in profits or a net margin of 17% (pretty high and very enticing to look at).

Let us apply if the Costco-effect took place with the same numbers without any growth at all in AMEX’s operations, AMEX would still have roughly  5, 247 USD million in profit (with 17% net margin).

This would mean a  -10.84% decrease in profits.

This is sad partnership ending indeed.

Further resources like Bloomberg stated that lost of Costco business represents a loss of 0.15 cents in AMEX’s EPS in 2015 by Morgan Stanley. Well, there are few more weeks before 2015’s end. So I’ll apply this rationale in 2014’s number (to be conservative–yet again).

***doing this approach eliminates any potential growth in profits that AMEX may have in 2015, but…. I just want to see****

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Author’s calculation.

There will just be -2.7% in profit loss to be recognized (take note: without growth).

This is far more uplifting for an AMEX shareholder than the very conservative -10.84% decrease in profits that I’ve calculated earlier.

Portales Partners LLC, on the other hand-same Bloomberg article, stated that it could be 20-30 cents loss-that translates to -4.5% profit loss at an average.

Anyhow, averaging both my estimate and theirs gives me roughly -7% profit drop when AMEX starts operating without Costco by March 2016.

Today (November 20, 2015), it is still too early to say what will be the future of AMEX in terms of sealing this profit-hole that’s just about to happen, maybe they’d be able to find a way to grow their profit once more.

Not to mention Warren Buffet has 151,610,700 AMEX shares in his portfolio as of 9/30/2015. AMEX is his number five best idea (top 5 in the portfolio). In addition, Jeffrey Ubben of Valueact ($17 Billion Hedge Fund) bought more of AMEX recently–having 11,300,000 shares (top 10 in his portfolio). ValueAct bought $1 USD Billion more of AMEX shares.

ValueAct wants to have ‘shareholder friendly changes‘ in response to this recent AMEX shares acquisition.

Okay, onto the next problem.

AMEX also lost a court decision whereby “AmEx’s rules are anticompetitive by not allowing merchants to promote other cards or offer certain discounts,” according to a WSJ article. However, the article further mentioned that, “The ruling doesn’t mean that AmEx must drop its rules immediately. The judge has asked both sides to submit a proposed remedy to the situation.”

Next,

For the most recent problem (published just yesterday (November 19, 2015) by Anne Steele of WSJ.

Quoted, “The city of San Francisco has sued  American Express Co.  for anticompetitive and alleged illegal merchant restraints.”

Further, “responsible for billions of dollars in excessive and improper costs,” and “the party is over for American Express, and the bill is coming due in California,” city attorney Dennis Herrera.”

These, in fact, are very strong words. And as an AMEX cardholder (not shareholder-still deciding) also worries me that I might lose some benefits in this good card of mine.

Going back,

I guess it’s just a string of bad luck for this wonderful 165-year-old company.

I guess that’ll do it for part one.

Next article would show a brief number simulation (profitability and a sample intrinsic value calculation) to see whether I’d buy AMEX shares or not.

References are already provided in the links above

Disclosure: I do not have shares in any of the companies mentioned in this article and don’t plan to initiate purchase within the next 24 hours. I would not receive any compensation for doing this article. I am not a professional financial analyst. This is just a hobby. Lastly, my work is not error-free, but I strive for it to be. Do not consider as a buy or sell advice. Invest at your own risk.

If you are interested in this similar approach to investing and would seek updates or share ideas, I wish to invite you to this Facebook group SEEKING VALUE (https://www.facebook.com/groups/SeekingValue/?ref=bookmarks)

Happy investing.

Mark Y.

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