10 Questions For the American Express (AXP) Analyst Day - Bernstein

American Express (AXP) is hosting its investor day tomorrow and Alliance Bernstein analyst, Kevin St. Pierre, poses 10 questions for management. No change to Outperform rating or $77 PT.

1) Is Senior Management on "Thin Ice"?

Given disappointing results over the past two years, miscommunications with the investment community, and initial rumblings from activist investors, controversy has heated up as to whether AXP's senior management is on the "hot seat". CEO Ken Chenault is 64 years old, and it would make sense for AXP to begin to establish a succession plan.

2) Is Amex Losing Market Share?

Large card issuers have put a renewed focus on their card businesses in light of a benign credit environment and slow growth in other areas of their business. In addition, in light of increased regulatory scrutiny and higher capital requirements, these banks are shifting to a more affluent customer base, which is Amex's main target segment.

3) What Factors are Driving the Accelerated MDR Decline in 2016 vs. 2015?

Management guided for an accelerated MDR decline in 2016 versus the 2 bps decline seen in 2015 (2.48% to 2.46%). Amex anticipates this accelerated compression due to the expansion of OptBlue, a greater impact from international regulatory changes, and continued competitive pressures, partially offset by the loss of Costco in the US and the lapping of the Costco Canada loss in 2015.

4) How Will the European Interchange Cap Affect AXP?

Though only Amex's GNS business (which operates as a four-party network) is directly affected, Amex's MDR will likely come under pressure as the company renegotiates rates with merchants in 2016.

5) How Will the Company Accelerate Revenue Growth from 4% in 2015 to 6% (or More) LongerTerm?

American Express posted FX-adjusted revenue growth of 4% in 2015 (excluding the effects of business travel and Concur) despite continued headwinds from oil prices, sluggish GDP growth and consumer spending, the loss of Costco Canada, and a slowdown in Costco US billed business. Management anticipates revenue growth accelerating in 2016 (exCostco), beginning in the first quarter.

6) How Much of the $1 billion in Cost Saves Will Be Operating vs. Marketing and Promotion?

American Express announced that they will take out $1 billion from their overall cost base by the end of 2017. These cost saves will come from total operating expenses, as well as marketing/promotion costs.

7) What Should We Expect in This Year's CCAR, and How Does the Costco Sale Fit In?

With the announced sale of the Costco loan portfolio to Citi later this year, American Express will generate an additional ~$1 billion gain. The significant reduction in risk-weighted assets will boost capital ratios. The company plans to leverage this flexibility to support growth in their lending portfolio, spend on growth initiatives, and to fund strategic acquisitions.

8) Is 12%-15% EPS Growth "On Average, Over Time" Still a Reasonable Target?

AXP's ability to generate outstanding returns and excess capital is the key to the superior EPS growth. Their ROE of 25%+ allows capital to grow at roughly 20% after dividends. With asset growth of 4-6%, this creates roughly 15% excess capital generation, with which they can repurchase 3% of shares annually – providing a significant t boost to EPS.

9) Is Starwood the Next Shoe to Drop?

The Marriott/Starwood merger is expected to close in the middle of this year, putting at risk the future of the Starwood/American Express co-brand relationship. It is estimated that the Starwood co-brand partnership accounts for roughly 2% of global billed business.

10) Is the Co-Brand Space Too Competitive for AXP to Succeed?

Excluding Costco and JetBlue, AXP's co-brand portfolio accounts for roughly 14% of global billed business and 33% of worldwide loans. Within that, Delta is their largest co-brand relationship, which accounts for 6% of global billed business and 20% of loans as of the end of 2015. Amex renewed their co-brand partnership with Delta in 2014. Other recent renewals include British Airways, Starwood, Iberia, Cathay Pacific, and a new deal with Charles Schwab.

For an analyst ratings summary and ratings history on American Express click here. For more ratings news on American Express click here.

Shares of American Express closed at $59.43 yesterday.

You May Also Be Interested In

• IBM tumbles on soft Q1 revenue; announces HashiCorp $6.4bn acquisition
• MarineMax (HZO) PT Lowered to $35 at Stifel
• Standard BioTools (LAB) Announces Operational Restructuring Plan, Cuts 10% Staff