Amex’s market cap has cratered in the wake of a tough year — and a new analyst note raises some questions. Amex, they say, is in denial over what it will take to right the ship. And what might that be?
What does it say when a marquee investment bank downgrades the shares of a marquee payments firm and the stock falls only 2 percent on the day?
It means there’s a floor under the stock. Maybe.
But if you’re American Express and you’ve been downgraded by Goldman Sachs … then again, maybe not.
Wednesday (Jan. 13), the credit card firm got docked a rating from Goldman, which took its view of the firm from “buy” to “neutral.” Granted, that’s not a “sell” rating, but then again, on Wall Street, hold ratings (which is what a neutral rating is, just using another word as a placeholder) can function as sell ratings. Confused? Well then, shorthand is: If it ain’t a buy, it’s a sell. The price target was decreased from $89 to $72, which is still a not insignificant $8 and change above the most recent (post-call) close.
The fundamentals driving the Goldman call: Shares could increase above current levels, but that’s predicated on whether the bottom line can swing 12 percent to 15 percent earnings per share growth — that would not happen until 2017, according to the Goldman report.
There are a few ways for that growth to be realized, said the sell-side analyst note, which could include cutting costs or even selling off the lending portfolio, but in order to take bold moves, Amex needs to have the mindset to make those efforts. However, “the company’s willingness and desire to do so are low,” said the analysts. Against that hesitancy, other credit card firms offer relatively better value profiles, including Discover Financial Services and Synchrony Financial, added Goldman.
Now, it could be the case that Goldman, giving the nod to the operational challenges that lie before the credit card behemoth, simply is playing catch-up to smaller players in the sell-side pantheon. Having a neutral stance on Amex shares is no heroic feat these days. Consider that JMP Securities initiated last month on the name with a “market perform” rating, which is akin to neutral. And the same day that Goldman downgraded, D.A. Davidson initiated with a neutral.
The past three months have seen earnings estimates for the current year come in from $5.70 to $5.44, which is a more telling factor than the “name of the ratings” that have been assigned to the company, because it shows that even those stalwarts with buy ratings have been likely taking in their numbers. So, being bearish on Amex right now takes no special leap of imagination or courage via a contrarian call.
Investors have followed that same reasoning, largely abandoning the name, which has cut its market capitalization to about $62 billion, where once, not long ago — in fact, roughly a year ago — that same measure was north of $90 billion. Worries over the death of the Costco deal, the strength of the global economy, the loss of the Fidelity partnership, whether cards in general can whether the digital wallet storm — add a few more of your choice — helped hurt the stock, too. Now, the multiple, having come in to about 11 times both trailing and forward estimates, seems to have a fair amount of pessimism baked in.
A few events may help lay out the near-term roadmap for the company. One will be the 2015 fourth quarter and full-year financial report next week, on Jan. 21, after the market closes. Certainly, we’ll get a sense of how the credit card company will position itself into the new year. But even before that, Kenneth Chenault, the chairman and CEO of the company, will deliver a keynote appearance at the NRF show next Tuesday. The topic will be “Leading Digital Transformation in a Rapidly Changing Industry,” and all ears, at least on Wall Street and the payments industry, will be tuned in to hear just how Chenault plans to tackle that transformation.
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