Modest Growth, Higher Spending to Persist at Amex

American Express (AXP) reported fourth-quarter earnings of $0.88, down just $0.01 from the fourth quarter of 2015, despite the loss of a large partnership with Costco, as the company benefited from the absence of a large impairment charge in the fourth quarter of 2015 and 7% decline in share count. American Express returned 138% of capital generated during the quarter. The company expects 2017 EPS of $5.60 to $5.80, implying a price/earnings multiple of 13 to 14 at our $76 fair value estimate. We’d like to see more evidence that the wide moat company is continuing to differentiate its offerings in a changing competitive environment before getting more bullish on its growth prospects. Indeed, the company’s top-line growth estimates seem relatively modest given the tailwind of electronic spending growth. This year, global billings grew by 7% excluding the loss of the Costco business, while U.S. business expanded by 6%.

Adjusted rewards spending grew by 13% as the firm introduced higher rewards in an increasingly competitive environment. The company also added $407 million in marketing and promotional spending. We remain concerned that top-line pressure will continue as OptBlue offers lower rates to merchants and tighter regulation of competitors’ interchange fees produces indirect pressure. The extremely competitive rewards environment may be an even bigger problem. We believe that monoline firms like American Express are finally feeling the impact of card industry consolidation that occurred prior to the financial crisis--competitors like JPMorgan can bid for card issuing business with the knowledge that many customers may eventually provide additional revenue as relationships deepen.

Management did indicate that the corporate card business and its international businesses are not suffering to the same degree, which makes sense as the firm provides a more unique value proposition to businesses and foreign issuing banks.

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