Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is American Express Losing Money?

American Express’s (NYSE: AXP) troubles are far from over. The grand old name in American credit cards lost 3.12 million members between fall 2016 and Spring 2017.

Amex had 36.95 million cardholders in autumn 2016 and 33.83 million card customers just six months later in spring 2017, Statista data indicates. The loss of members in the 12 months between spring 2016 and spring 2017 was even worse. American Express had 37.81 million memberships in spring 2016 and 33.83 million a year later.

If Statista’s data is correct, Amex lost nearly four million cardholders (3.98 million) in a 12-month period. The divorce from Costco Wholesale (NASDAQ: COST) has hurt American Express badly. The damage is seen in both the members and the finances the company’s profits and income are in freefall.

American Express’s Income is in Freefall

American Express reported a loss of $1.2 billion instead of a net income on December 31, 2017. That amounted to a 245.09% decline in net income over the course of according to Google Finance.

It also led to a net profit margin of 14.95% and a diluted earnings per share (EPS) number of -1.141 on the same day. Google Finance calculated that American Express’s profit margin fell by 230.45% and its EPS sank by 262.07% during 2017.

Even Cary Grant went to American Express when traveling in the 1960s. Charade, Universal Pictures 1963.

Despite that American Express is making a lot of money. It reported an operating income of $1.82 billion on December 31, 2017. That income increased by 15.33% during 2017, so the actual amount of extra cash or float at Amex is growing.

American Express is still a Value Investment

Strangely enough, American Express is still a value investment despite its drop in subscribers and net income. Amex is still a value investment because it is an incredibly cash-rich company.

American Express had $33 billion in cash on hand on December 31, 2017, according to Google Finance’s numbers. The cash on hand increased by 31.51% in 2017, so Amex still knows how to generate a lot of float.

It also knows how to expand revenues even though the company is having difficulty with cost control. Quarterly revenues grew to $8.01 billion in 4th quarter 2017, an increase of 11.19% over the same period in 2016.

The problem with that was the cost of revenue grew by 16.15% to $2.38 billion in the same period. American is generating more revenue at a higher cost.

The real problem here is that revenue growth is not yet covering the cost of revenue. The rate of growth for revenue cost exceeds the rate of revenue growth by 5.14%. In layman’s terms, American Express is paying more money to attract fewer customers.

Even with those problems the company is a value investment because it can generate a lot of cash in spite of them. Amex’s basic business model is still sound, even though it is having a far harder time connecting with and servicing customers. The cash is still there but the business is in decline.

American Express’s Brain Drain

American Express’s biggest problems might be in its executive suites. The company seems to be running a training program for Fintech executives who migrate off to make more money elsewhere, Bloomberg Businessweek reporter Jennifer Surane observed.

She noted that the CEO of PayPal Holdings (NASDAQ: PYPL); Amex’s fastest-growing US competitor is Dan Schulman. Schulman used to run American Express’s enterprise growth division. Other Amex Alumni have turned up at JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Visa (NYSE: V).

Chase’s super popular Sapphire Reserve card is the work of Pamela Codispoti an American Express veteran, Surane pointed out. Other Amex refugees have been able to supercharge the credit card operations elsewhere because of their inside knowledge of the business, guess where they learned it.

An obvious reason for the talent exodus was former CEO Ken Chenault; who just retired after 17 years on the job. Many ambitious execs walked off because they figured there is little or no chance of reaching the corner office at Amex. Other attractions include the big money to be made at banks and in Silicon Valley.

Amex’s Brain-Drain Opportunity

The brain drain is a serious problem for Amex because it deprives the company of needed industry knowledge and experience. Yet it is also an opportunity because American Express has a chance to promote younger and more creative executives more open to new opportunities.

This includes cryptocurrency, at a time when other credit-card industry CEOs are shutting off cryptocurrency debit cards and payments, Amex is pursuing them. Visa is dumping cryptocurrency debit cards from its network, and Capital One (NYSE: COF) and Discover (NYSE: DIS) is refusing to pay for cryptocurrency purchases, news stories indicate.

Discover CEO David Nelms is letting his prejudices do his thinking for him. He denounced all cryptocurrency users as crooks in a conversation with Surane, Bloomberg reported. That’s unfair and narrow-minded, and the perspective of a 56-year-old man who is probably spending most of his time thinking about his retirement home.

In contrast, Amex is experimenting with Ripple (XRP) cross-border payments and participating in the Hyperledger Project. Hyperledger is an open-sourced software development effort for the Ethereum blockchain ecosystem.

Will Cryptocurrency Save American Express from itself

This type of next-generation thinking might save American Express from itself. An Amex card, app, and digital wallet that converted cryptocurrencies into fiat-currencies would be a huge moneymaker. It would also be very popular outside the United States, and with younger consumers.

A smart move for Amex would be to buy one or more the startups developing such technology. Logical targets in that area would be Centra and TenX. Another would be to form a partnership with such organizations.

Even if such next-generation moves pay off they can backfire. If Amex’s corporate culture does not change, all that will happen is the next-generation of brilliant young Fintech executives will get a good education in cryptocurrency and blockchain. They’ll then take that expertise straight the door and leverage it into better jobs and bigger paychecks at American Express’s competitors.

A new corporate culture might be needed at American Express if this grand old American brand is to survive. The first order of business for new CEO Steve Squeri should be changing Amex’s corporate culture.