It’s been a really tough year for American Express (NYSE: AXP). First, the grand old brand in American credit cards lost its all-important Costco Wholesale (NASDAQ: COST) deals in the United States and Canada. Then J.D. Power reported that Discover (NYSE: DFS) is now America’s favorite credit card brand.
Now Bloomberg has published a story showing Amex’s famous mascot sleeping in a box on the street to symbolize the legendary brand’s fall from grace. The only good news that American Express has been able to report in recent weeks is a deal to let its customers swipe their cards at Walmart’s and Sam’s Club. The problem with that is that Sam’s Club has been losing the club store wars to Costco.
The claim that American Express has lost its luster, despite risky moves, such as letting its users participate in newfangled payment apps like Apple Pay, Android Pay and Samsung Pay, seems to be justified. The card that was once a symbol of American capitalism, hence, the derisive nickname “American Excess Card”, is now widely viewed as just another piece of plastic.
American Express Having Trouble Keeping Up
Here are a number of statistics that show the problems facing American Express. They include:
- Amex has around 112 million U.S. cardholders. In contrast, Visa (NYSE: V) has around 300 million and MasterCard (NYSE: MA) around 200 million. Amex still has slightly more cardholders than Discover does.
- There were around $12 billion in U.S. purchases with Visa cards last year, but $6.84 billion with American Express plastic, The Wall Street Journal reported. The volume of Amex payments was still twice that of Discover, but lower than MasterCard’s, around $6 billion.
- JD Power reported that American Express scored 820 on a customer satisfaction survey, while Discover scored 828. That makes Amex the second-best liked credit card in America.
- Three big credit card servicers are larger than Amex. They are Bank of America NYSE: BAC), Citigroup (NYSE: C), and JP Morgan Chase (NYSE: JPM).
- American Express is accepted at around six million locations in the U.S. Discover, Visa, and MasterCard are accepted at nearly 10 million locations.
- Since 2013, households that make more than $125,000 a year are more likely to have a Chase card than an Amex card. That might be why Costco dumped American Express.
- Over the past nine years, the average American Express card swipe fee (the source of the company’s profit) has fallen from around 2.6% in 2006 to 2.4% in 2014. That means Amex is making less money on each transaction.
- Around 10% of American Express cards, or about 10 million, are Costco branded, meaning the company loses 10% of its U.S. customer base when it gets thrown out of Costco next year.
Naturally, many people will wonder if American Express is a dying brand or a poor investment. Actually, no, American Express is still a great company and a pretty good investment. In fact, the numbers show us that Amex could still be a great value play.
Why American Express could be a Great Value Investment
The truth is that despite its problems, American Express is still a great value investment. It’s a good company that makes a lot of money. Here are a few numbers that show us why Uncle Warren is still right about American Express:
- American Express still has a lot of cash. It reported revenues of $33.67 billion, a net income of $5.922 billion, a free cash flow of $1.894 billion, and cash and short-term investments of $10.41 billion on June 30, 2015.
- American Express still makes a lot more money from its customers than its rivals. Bloomberg reported that the average Amex purchase in 2014 was $144, while the average Visa purchase was $84 and the average MasterCard purchase was $90. That means Amex makes more money every time somebody swipes a card.
- American Express is still the number two credit card brand in the U.S. by volume of spending. In 2014, Americans made $1.21 trillion in purchases with Visa, $684 billion in purchases with Amex, $607 billion in purchases with MasterCard, and just $129 billion in purchases with Discover cards.
As you can see, American Express is still a money machine – it just isn’t as profitable a money machine as it used to be. It will face a big test next year when it loses Costco, but it has a huge opportunity in the form of payment apps. Solutions like Apple Pay and Android Pay could increase Amex’s volume because they can be used in establishments that do not accept American Express cards.
How Apple Pay Could Save American Express
That means American Express’s fortunes are now tied to Apple Pay. If Apple Pay could boost Amex’s profit, it could justify that application’s existence and prove its worth. One has to wonder if the cachet of the Apple Inc. (NASDAQ: AAPL) brand could make up for the loss of Costco at American Express.
Unfortunately, payment apps are a double-edge sword because some gigantic retailers, including Costco, Walmart, Kroger, and Target, are not accepting them yet. Those companies are also designing their own payment solution, called Current C, in an effort to bypass payment processors like American Express.
An even greater long-term threat to American Express could be PayPal (NASDAQ: PYPL), which became independent this year. PayPal competes directly with Amex with Visa and MasterCard branded cards; it also operates its payment solutions network in the form of Braintree, and owns a very popular money transfer app called Venmo.
American Express is a very good company with a questionable future. It will need to make some serious changes to survive, and one obvious move would be to offer its own payment app. Another would be to start participating in PayPal, which is becoming one of the most successful payment platforms.
Despite the doubts about its future, American Express is still a really good stock, although I would hold off on buying it until we see what the fallout from the Costco divorce amounts to. My guess is that Amex’s share price will keep falling for several months and then rise next year.
That means American Express could be a nice bargain stock at some point next year. It also means that Amex is still a really good long-term investment, even if it is no longer America’s favorite credit card.
Disclosure: the friendly neighborhood blogger owns shares of PayPal and Bank of America.