You know you’ve hit a rough patch when even Costco kicks you to the curb.
But that is exactly what happened to American Express Company (NYSE:AXP) earlier this year when Costco Wholesale Corporation (NASDAQ:COST) walked away from their payment-network and co-branded card arrangement. Amex had been the exclusive card accepted at Costco stores for the better part of two decades, but that distinction will belong to rival Visa Inc (NYSE:V) starting next March.
Amex would argue that it walked away from the deal because Costco was demanding the proverbial pound of flesh. (Costco wanted a reduction in its interchange fees, from 0.6% to 0.4%.) Yet Visa seemed to have no problem with the arrangement.
While this news is not particularly new, its full effects won’t be felt for a while. The Costco cards represent about 10% of all American Express cards in circulation and 20% of the American Express loan portfolio.
But Costco wasn’t the only bump in the road. In February, budget airline JetBlue Airways Corporation (NASDAQ:JBLU) dropped Amex from its branded credit card in favor of Mastercard Inc (NYSE:MA). And last month, Amex got a setback in court. Amex had previously prohibited its merchant customers from steering shoppers to use Visa and MasterCard’s cheaper networks with cash back or other incentives. But a federal judge ruled in April that this was an abuse of Amex’s market position and ordered it to lift the ban.
If there is anything that might pass for good news these days, I suppose it would be that its partnership with Wal-Mart Stores, Inc. (NYSE:WMT) — to provide basic banking services to low-income shoppers — is still alive and well. Though if Amex is trying to maintain its image of exclusivity, I question whether Wal-Mart is the best partner. (On a side note, two years ago I covered Amex’s decision to gut its travel services — a move I questioned as being potentially damaging to Amex’s prestigious image.)
When it rains it pours, and AXP stock has taken a real beating this year. The share price is down about 19% from its highs a year ago.
After a drop like that, might the bad news finally be priced into AXP stock?
Let’s take a look. At first glance, Amex is relatively cheap at 13.7 times trailing earnings. Longer term, Amex trades at a cyclically adjusted price-to-earnings ratio (CAPE) of 18.6. While not cheap by the standards of the 2008 meltdown, it’s cheaper than the average from the early and mid-2000s.
To put that CAPE valuation in perspective, that’s less than half the valuation of Visa and MasterCard. Of course, Visa and MasterCard are very different animals. Unlike Amex, they take no credit risk and are essentially nothing more than payment toll roads. Amex has more in common with its less glamorous competitor, Capital One Financial Corp. (NYSE:COF). And here the comparison is less favorable — Capital One trades for 11 times trailing earnings and at a CAPE of 14.
Amex might normally be expected to trade at a premium to Capital One given the higher credit quality of its cardholders. But then, Capital One’s cards are accepted everywhere Visa and MasterCard are accepted, and Amex seems to be taking attacks on all fronts. Amex’s market share has remained constant for years, but if the Costco and JetBlue moves are any indication of things to come, that market share might quickly come under threat.
I hate to bet against one of Warren Buffett’s largest holdings, but I would steer clear of American Express for now. The stock is in freefall, and it’s generally best to avoid catching a falling knife. At under $70, I might nibble. But given its recent setbacks and what it might foretell, Amex just isn’t cheap enough at current prices.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.