Capital One (COF) May Benefit from Termination of Costco (COST), American Express (AXP) Partnership

February 13, 2015 9:37 AM EST
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Deutsche Bank maintained a Hold rating on American Express (NYSE: AXP) and lowered its price target to $88.00 (from $99.00). Analyst David Ho discussed terminations of its agreement with Costco Wholesale (NASDAQ: COST). In his view, the news is potential positive for Capital One Financial (NYSE: COF) and could translate into 6% EPS upside.

"Our base case assumes a $0.58 hit from Costco USA from: 1) a 10 cent drag from all Costco in-store billed business going away (~3.5% of total volumes). 2) a 35 cent drag from the sale of the Costco loan book to the new issuer. 3) a 13 cent drag from retaining only half of the 70% of non-Costco purchase volumes from the old card. Ultimately, we believe the Costco USA exit could be a 40 to 65 cent EPS drag, with the biggest swing factor on what happens to the Costco loan book," said Ho.

On Capital One Financial, Ho said, "We estimate ~6% EPS upside to COF if it wins the Costco USA agreement, but there are obviously many factors at play."

"We believe COF is a finalist amongst Citi (NYSE: C), BAC (NYSE: BAC), and Chase (DFS (NYSE: DFS) isn’t likely given Costco will likely prefer to allow multiple issuers on network)," continued the analyst. "Aside from already winning Costco Canada, we think COF is a candidate given it may be more willing to accept the tradeoff of lower in-store discount rates at Costco to generate additional balances and spend vs. some peers. Also, COF’s full credit spectrum customer base (i.e. 33% <660 FICO vs. 16% for peers) may align better with Costco USA."

"We believe Costco USA could generate ~45 cents of additional EPS in 2016, assuming: 1) 35 cents from acquiring the Costco USA loan book (but with 50% runoff). 2) 4 cents from incremental in-store Costco spend, and 3) 7 cents from non-Costco general purpose spend (assuming it can achieve 15% of AXP’s non Costco spend levels). Overall, we think the biggest EPS driver would come from balance growth over time. However, we are cautious given Costco USA may be structured like Canada (i.e. multiple credit card issuers under the same network allowed at Costco), which would allow for intense competition for spend and balances," he added.

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 $80.48 yesterday.

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