Macro conditions may not be too bad for payment processors, but competing against Visa and MasterCard definitely could be
Bank of America/Merrill Lynch recently hosted an investor meeting with the CEO and CFO of American Express Company (NYSE:AXP). The research firm reiterated its an Underperform rating on the stock, as it believes that struggle for the company is inevitable in the coming quarter as competition from two giants, namely Visa and MasterCard, shows no sign of ceasing.
There wasn’t any news in the investors meeting to be given attention to, but American Express seems confident about several growth opportunities, that will allow it to replace Costco business and deliver perfectly on its financial targets. Without a doubt, the competition remains strong for its core business, but American Express may still be underestimating the degree to which Visa and MasterCard are willing to gain more share from the former. The co-brand segment remains highly competitive, but American Express believes that it can drive better customer engagement and provide attractive returns to shareholders in core products.
American Express is of the opinion that its proprietary products and brand still resonates with its core strategy and customers. It also believes that it can penetrate in credit growth, mainly driving income from fees. At the same time, the commercial card competition is intense and migrating away from large corporate segments, where American Express has a 63% share in the Fortune 500.
MasterCard and Visa operate on a broader network when dealing with large corporate clients and also where competition is intense. However, American Express believes that there is significant growth potential in small business and middle markets, where competition is not that intense and it can leverage its data and reporting.
According to BAML, given the pending sale of Costco portfolio and lower risk-weighted asset base, the market may still be optimistic over capital returns from American Express. With CCAR result due in the coming weeks, investors are quite focused on capital returns, more than anything right now. BAML expects the American Express to be on the higher spectrum by then.
Analysts on Bloomberg are slightly bullish on the stock. Out of 34 analysts, eight suggest a Buy, 21 recommend a Hold, while only five suggest a Sell.