American Express Caught in a Premium Bind
- By Sangara Narayanan
With American Express (AXP) sitting at the high end of the payment industry attracting affluent customers for several years, the gap between American Express and its competitors, Visa (NYSE:V) and MasterCard (MA), has become extremely wide.
In 2015, American Express accounted for a mere 7.3% of global transactions resulting in annual revenues of $32.81 billion while Visa accounted for 56% and made $13 billion.
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The intrinsic value of AXP
The numbers make it clear that American Express revenues do not depend on the volume of transactions processed by the company, the main reason being that American Express depends more on customer and merchant fees. Visa and MasterCard, on the other hand, tend to depend more on interest paid on amounts due.
It's essentially the same difference that exists between Apple (AAPL) and Samsung (005930.KS). Or business class versus economy, for that matter. American Express targets customers with high disposable incomes, the kind of people who spend a lot more than the "average" person.
This is merely Amex's trough
But the company faced huge headwinds last year leading to a sales decline in 2015. Berkshire (NYSE:BRK.A)(NYSE:BRK.B), the largest shareholder in American Express, holds nearly 16% of the company's stock - more than 150 million shares. The stock's decline has been affecting the performance of the company, but Warren Buffett remains confident enough to keep his holding intact despite mounting criticism that Berkshire owns a few companies that are past their prime.
" Anybody in payments who's an established long-time player with an old method has more danger than used to exist," Charlie Munger, Berkshire's 92-year-old vice chairman, said at the company's annual shareholders meeting in Omaha, Nebraska. "There's more fluidity."
Amex needs to forge and foster partnerships
One of the biggest reasons for Amex's sales decline is the company's fallout with Costco (COST), which accounted for 8% of the company's total card spending in 2015. The company continued to face issues with big partners throughout the year. American Express does charge more than other card companies so in times of difficulty when big merchants are looking for the extra one cent to save American Express takes a hit. With plenty of alternatives that are ready to undercut their fees, switching partners has become easier than ever. As a premium payments provider American Express is facing the brunt.
Though there is no equivalent of American Express, there are plenty of cost effective alternatives around. The rise of mobile wallets can also bite the company hard, and it really depends on how American Express is able to keep innovating its way into the future. Striking more partnerships will be the key to covering its short-term issues while in the long run, the company's deep pockets can help it withstand any onslaught. As long as it keeps its focus on the premium segment, it will never be possible to write this company off.
Disclosure: I have no positions in any of the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of AXP
