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Shares of American Express (NYSE: AXP) are already down 20% year-to-date after the company posted abysmal fourth-quarter earnings. The stock is now well off its $95 all-time high share price from 2014.
The big news of late is that the activist investor that bought into American Express last year has sold its stake.
ValueAct Capital, the activist investor that had a roughly 1% stake heading into the fourth quarter of last year, has reportedly sold its entire stake. The issue is that ValueAct wanted management changes, but Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B), which owns approximately 15% of American Express, pushed back.
Buffett tends to be a big backer of management teams that he’s heavily invested in. He has been a steadfast owner of American Express for decades. He’s also been a public supporter of AmEx CEO Ken Chenault for a number of years.
Is This Really the Right Team?
With the sell-off, American Express appears to be cheap. It now trades at less than 10 times earnings, offers a 2.1% dividend yield and generates a 26% return on equity. However, the big overhang is that other companies, such as Square (NYSE: SQ), are taking market share in the merchant transaction and point-of-sale market.
There’s also the potential for more losses in its co-branded card portfolio, similar to what happened with Costco (NASDAQ: COST). In 2015, AmEx lost its 16-year partnership with Costco when the retail warehouse club opted to partner up with Citigroup (NYSE: C) for card processing.
Ken Chenault has been American Express CEO for 15 years and has navigated the company through tough times in the past. As Buffett said of Ken Chenault at the 50th annual Berkshire Hathaway shareholder meeting last year, “Ken has done a sensational job anticipating some of these trends and guiding it into some of those markets.”
The New Reality
American Express’ fourth-quarter 2015 earnings came in 38% below where they were in 2014. The outlook for 2016 also wasn’t great. AmEx is expecting full-year 2016 earnings of $5.60 a share – well below the $5.99 a share analysts were expecting.
However, things were not all bad. American Express appears to be using the disappointing earnings results as a wake-up call. The company plans to cut costs by $1 billion before the end of next year.
Ken Chenault rarely participates on earnings calls, but he was on the call last week. He noted, “We recognize we are operating in a new reality.”
This is very true, as competition is getting more aggressive in the credit card, loan and merchant businesses. Yet American Express still has key advantages over its peers, including its affluent cardholder base that will spend in any economic environment. It also collects vast amounts of data on its customers, including spending patterns.
Still a Top Warren Buffett Stock
The big key for American Express going forward is identifying new growth areas. This includes capitalizing on its network effects and the intangible assets. The big thing to watch for in 2016 and 2017 is American Express’ ability to monetize its closed-loop network, where it not only issues cards but has vast merchant relationships. There’s money to be made for American Express by monetizing the data it has on spending habits.
Part of the reason Buffett is such a great investor is that he looks to own stocks for a very long-term time horizon. Buying the recent fear means being willing to take short-term pain to get the long-term payoff. This short-term pain in American Express could be a great buying opportunity for long-term shareholders.
American Express truly appears to be one of Buffett’s forever stocks.