Can American Express Survive without Costco?

There’s good news and bad news at American Express (NYSE: AXP); the grand old name in credit cards will be thrown out of US Costco Wholesale (NASDAQ: COST) stores next month, but its revenues have increased slightly.

The good news is that Amex’s revenues increased slightly in first quarter 2016, after two years of decline. American Express ended fourth quarter 2015 with a TTM revenue of $32.82 billion that grew to $32.96 billion three months later. The increase is slight, just $14 million but it is growth.

This was the first revenue growth Amex has reported since December 2014; which indicates the company could be covering from the loss of Canadian Costco stores. The problem is that the revenue surge could have been created by spending from Costco customers; who are afraid they’re going to lose their American Express cards on June 20.

Why June 20 could be Doomsday for American Express

June 20 is the date that Costco is supposed to pull the plug on Amex and adopt a new Citigroup (NYSE: C) Visa card. It could also signal massive revenue losses for American Express as it loses one of its biggest marketing assets.

The damage could be considerable because American Express has lost around $1.23 billion in revenue since December 2014. Amex is caught on a sort of treadmill right now, running in one place just to keep the revenue it has.

FILE - In this May 4, 2010 file photo, a customer looks at wide screen sets advertising American Express cards at a Costco store in Mountain View, Calif. Costco shoppers who have been limited for years to American Express credit cards may be able to pluck a new option from their wallets or purses next year when an exclusivity deal between the two companies expires on March 31, 2016. (AP Photo/Paul Sakuma, File)
FILE – In this May 4, 2010 file photo, a customer looks at wide screen sets advertising American Express cards at a Costco store in Mountain View, Calif. Costco shoppers who have been limited for years to American Express credit cards may be able to pluck a new option from their wallets or purses next year when an exclusivity deal between the two companies expires on March 31, 2016. (AP Photo/Paul Sakuma, File)

Amex will take a big hit from the cost loss because 17% of its American cardholders are Costco members, Business Insider reported. To make matters worse those members account for 8% of American Express’s billed business and 20% of its outstanding loans.

That means Amex could lose as much as 10% of its business this quarter, a hit that will severely both the company and the brand. Yet as I have noted elsewhere this company is far from a value trap.

Amex is Still a Value Investment

Despite the revenue losses, American Express reported the following interesting numbers for first quarter 2016:

  • A diluted earnings per share (EPS) number of 5.002. During the April 20, 2016, Conference Call, CFO and Executive Vice President Jeffrey C. Campbell placed the monetary value of the EPS at $1.45.

 

  • A profit margin of 17.63%.

 

  • A net income of $5.064 billion. This was still lower than March 2015 when the net income was $5.978 billion. This means American Express’s net income fell by $914 million over the past year so the revenue losses are beginning to hit the bottom line.

 

  • A free cash flow of $2.167 billion. There’s good news here, because the free cash flow is slightly higher. It was $1.87 billion in March 2015 – an increase of $297 million.

 

  • $11.31 billion in cash from operations – an increase of $1.479 billion over March 2015 – when the number was $9.831 billion.

 

  • Cash and short-term investments of $25.05 billion – an increase of $1.48 billion over March 2015 – when Amex had $23.57 billion in the bank.

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American Express has a lot of cash and a lot of float. It is still a value investment and the company still has the resources it needs to reverse the revenue losses.

More importantly it looks some of the risks that CEO Kenneth I. Chenault has made are paying off. Some of the risks that Chenault has taken such as embracing Apple Pay and Android Pay, do generate revenue and cash.

American Express’s Surprisingly Bright Future with Lendio?

This increases optimism about some of the other steps, Chenault is taking. American Express just entered into an alliance with small business platform Lendio, Business Insider reported. This puts American Express into the world of alternative small business lending.

More importantly it heads off the challenge from aggressive competitors like PayPal Holdings (NASDAQ: PYPL), On Deck Capital Inc. (NYSE: ONDK) and Lending Club Corp (NYSE: LC). These companies offer a slightly more flexible and easier to get alternative to American Express’s products.

The Lendio deal could serve as a template for similar arrangements with the likes of On Deck. That could turn Amex into a delivery platform for peer-to-peer loans and allow the creation of a hybrid credit card that allows business people to access a variety of lines of credit.

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An intriguing possibility is that American Express might buy one of the lending platforms and integrate it with its ecosystem. That would make Amex a major player in a fast growing market. Business Insider predicted that the volume of alternative small business lending in the United States will increase by 16.4% between 2015 and 2021.

Amex is Still a Value Investment

Another advantage of this is that it will enable to American Express to increase its role in ecommerce and attract more millennial and younger customers; who prefer alternative lending to credit cards. Such moves and savvy marketing strategies; like sponsoring Beyonce’s Formation tour, will help strengthen Amex’s weak brand with younger customers.

Despite the June 20 deadline, American Express is still a value investment. It is a well-run company with a lot of cash, a lot of float and a great deal of marketing creativity. People who buy Amex as a value investment; a dividend stock, or a growth stock will not be disappointed because American Express will survive and grow without Costco.

Disclosure: the blogger recently sold shares of PayPal.

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