Market Mad House

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

The Death Spiral

The Decline of American Express

American Express (NYSE: AXP) has become like the Roman or Ottoman Empires; it is experiencing a long, slow and painful decline. The decline is not leading a fall yet, but a much diminished future is clearly in sight.

The greatest danger at Amex is its’ steadily shrinking revenues. The credit card giant’s revenues fell by $200 million during the first quarter of 2017. American Express started 2017 with $32.12 billion in revenues that fell to $31.92 billion just three months later in March 2017.

This suggests that Amex’s market share is slowly eroding like a piece of land that is slowly being worn down by a flowing stream. Just like a riverbank, American Express’s revenues and business will get undermined and suddenly collapse someday if the process is not reversed.

That erosion might take a long time because Amex is still making a lot of money but those who look closely can see the signs of imminent collapse. The most worrying trends are out there in the credit card market.

Amex is losing the Credit Card Wars

Recent news articles indicate that American Express has suffered some serious reverses in the credit card wars. The latest defeat occurred in what The New York Times labeled “the Snob War.”

Affluent younger Americans prefer JPM Morgan Chase’s (NYSE: JPM) Sapphire Reserve Card to Amex’s offerings, The Times reported. Market research indicates that Millennials are dismissing the American Excess card as a relic of the garish Eighties and Nineties. It is after all the card that Donald J. Trump; whom Millennials love to hate, probably has in his wallet.

Urban hipsters prefer the Sapphire Reserve; because it is “interesting,” but think Amex is boring. One problem here is that trendy young people think of American Express as; that card mom used to pay for laundry detergent at Costco (NYSE: COST) rather than a symbol of wealth and luxury.

Amex is after all a very 20th Century brand; that is class conscious, materialistic and suburban. Those are not good selling points in a nation that is suspicious of elites, skeptical of materialism and increasingly urban.

Has American Express Become Irrelevant?

Basically, American Express no longer seems relevant in today’s world which is one of the reasons why both Jet Blue and Costco dumped it.

One reason why Amex is now irrelevant is that a lot of the services it provides can be done better, faster and cheaper by apps and the internet, David Robertson of The Nilson Report told The Times. Generation X and Millennial consumers buy airline, sports and concert tickets from Priceline and StubHub.

The same people turn to Uber for rides around town; TaskRabbit for part time help, Airbnb for a place to sleep and UberRush for meals. They have no reason to shell out higher fees for “services” they get free through Smart Phones. Apple (NASDAQ: AAPL) and Android might be slowly destroying American Express’s business.

A related problem is that American Express is a brand designed for brick and mortar retail which is in decline. Readers of this blog will know that major retailers such as Macy’s (NYSE: M) are closing hundreds of stores. Instead people are buying online where nobody can see your credit card, so nobody cares what brand they use. The prestige of the American Express card is now irrelevant.

American Express Strikes Back

To its’ credit Amex is aware of these trends and fighting back. American Express’s Platinum card has been redesigned to be less flashy and new cardholders are rewarded with a $200 Uber credit. The company has even tapped Gen X icon Tina Fey as a spokeswoman.

More importantly Amex has eagerly embraced App based payment by quickly supporting both Apple Pay and Android Pay. When Apple Pay entered Canada, American Express made the first announcement.

There’s obviously still some life left in American Express. The company has a lot of imagination and resources so it might be able to turn around.

 Is American Express Making Money?

Many value investors will see Amex’s lack of hip as a selling point. After all unfashionable means less popular; which makes for lower stock prices. That might make AXP an underappreciated bargain of a stock.

To see if such suspicions might be true I took a look at American Express’s latest earnings report; the one for March 31, 2017. There I found a lot of evidence that Amex is still making tons of money including:

  • A 15.68% profit margin.


  • An income of $5.219 billion.

  • A free cash flow of $883 million.


  • $6.855 billion cash from operations.


  • $29.37 billion in cash and short-term investments.


  • Total assets of $161.38 billion.

These figures show that American Express is still a value investment because it has a lot of float. Despite that there are some serious problems at the grand old brand in credit cards.

American Express is Making Less Money

The net income figure in particular indicates that Amex is making less money. The net income was $5.408 billion in December 2016 and $5.219 billion in March 2017.

If those numbers from ycharts are correct; American Express’s income fell by $189 million during the first quarter of 2017. The loss of the Costco business is being felt at Amex.

A far more troubling number is cash from operations. The amount of cash that American Express generated from its’ operations fell by $4.155 billion in the 12 months preceding March 31, 2017. Amex reported $11.01 billion in cash from operations in March 2016 and $6.855 billion a year later.

To make matters worse, American Express’s cash from operations fell by $1.369 billion during first quarter 2017. Amex reported $8.224 billion in cash from operations in December 2016 and $6.855 billion just three months later.

That number indicates that American Express’s business might not be sustainable. At some point it might have to start making major cutbacks just to stay in operation. A likely possibility will be selling off of assets or pulling out of some markets.

Stay Away from American Express

My take is that American Express is not a good long term investment because its business is not sustainable. There is simply no way that it will be able to keep paying out 32¢ dividends.

American Express is overpriced and headed for a serious fall. Stay away from Amex shares unless you are looking for something to short.