Reputations can take decades to build … and only minutes to throw away.
I thought of this last week when I read that American Express (NYSE:AXP) was gutting its travel services, laying off more than 5,000 employees — or roughly 9% of its work force — most of whom worked in travel.
Remember, AmEx is the card for the global elite — executives and high-net worth consumers. There is a certain cachet to pulling an American Express card out of your wallet, particularly a Centurion Card (also known as “the Black Card”). In the company’s own words, AmEx targets “super-affluent high net worth individuals on a continual quest for the best and most exclusive. They own companies and frequently travel; they define success.”
High-end travel services were part of what gave AmEx its prestige, so pulling back on the perks that give American Express its aura of exclusivity might seem risky. Though, as AmEx CEO Kenneth Chenault noted in the post-earnings conference call, the economics of corporate travel are changing.
In a time of threadbare budgets and global austerity, a full-service travel agency might seem a bit frivolous. And cost-conscious businesses are finding ways to reduce travel costs, both by traveling less (Skype conference call, anyone?) and by using lower-frill airlines and hotels. I have no hard data on this, and I don’t know if it is even tracked, but I’ve observed on recent flights that business class has been noticeably devoid of suit-wearing gentlemen in their 40s and 50s — what we might think of as “the business crowd.” There are a lot more grey flannel suits in coach these days. Again, no hard data here; just an observation.
So, American Express’ decision to scale back its travel services might simply be an acknowledgement of changing times. But AmEx has made some other moves recently that would seem to be chipping away at its high-end image.
For example, the company partnered with Walmart (NYSE:WMT) — yes, Walmart — in launching a reloadable prepaid card targeted at lower-income consumers who often have no access to the traditional banking system.
Now, I have nothing against Walmart. I own shares in the company, and I myself have saved thousands of dollars over the years buying my sundries there. But I can’t escape the thought that AXP is going slumming.
American Express should tread carefully here. What separates AmEx from the Visa (NYSE:V) and MasterCard (NYSE:MA) cards used by the lumpenproletariat masses is the image of exclusivity. American Express doesn’t sell financial services; you can get those from any bank down the street. No, AmEx sells image.
And Walmart prepaid cards might not quite be the best way to sell that image. Just sayin.’
AmEx never can compete with MasterCard and Visa in the mass market, but it doesn’t need to. The company has roughly an 8% market share based on cards in circulation, according to Card Hub. Yet it has 23.8% of market share by purchase volume, barely 3% below MasterCard. There are a lot fewer AmEx users, but collectively they spend a lot more than the average credit card user.
Unlike MasterCard and Visa — which are payment networks and not banks — American Express is an actual financial institution with all of the assorted risks this entails. Not surprisingly, AXP trades at a substantial discount to its payment network rivals — a forward P/E of 12 vs. 19 and 20 for Visa and MasterCard, respectively. But given the higher credit quality of its borrowers, it trades at a premium to mass-market card issuers like Capital One (NYSE:COF), which trades for just 8 times expected earnings.
Based on the numbers, American Express stock is probably priced “about right,” neither expensive nor cheap. But I am not a buyer at current prices.
AmEx seems like a company struggling to find its way in a changing market. A marketer of exclusivity has no business offering prepaid card at Walmart.
Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore Capital was long WMT. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”