{"id":35412,"date":"2013-01-15T12:24:34","date_gmt":"2013-01-15T17:24:34","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35412"},"modified":"2013-01-15T12:24:34","modified_gmt":"2013-01-15T17:24:34","slug":"is-amex-going-slumming","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/01\/15\/is-amex-going-slumming\/","title":{"rendered":"Is Amex Going Slumming?"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Reputations can take decades to build\u2026and only minutes to throw away. \u00a0I thought of this last week when I read that American Express (NYSE:$<\/span>AXP<\/a>)<\/b> was gutting its travel services, laying off more than 5,000 employees\u2014or roughly 9 percent of its workforce\u2014most of whom worked in travel.<\/p>\n

Remember, Amex is the card for the global elite\u2014executives and high-net worth consumers.\u00a0 There is a certain cachet to pulling an Amex card out of your wallet\u2014particularly a Centurion Card (also known as \u201cthe Black Card\u201d).\u00a0 In the company\u2019s own words<\/a>, Amex targets \u201csuper-affluent high net worth individuals on a continual quest for the best and most exclusive. They own companies and frequently travel; they define success.\u201d<\/strong><\/em><\/p>\n

High-end travel services were part of what gave Amex its prestige. \u00a0So pulling back on the perks that give Amex its aura of exclusivity might seem risky. \u00a0Though as Amex CEO Kenneth Chenault noted in the post-earnings conference call, the economics of corporate travel are changing.<\/p>\n

In a time of threadbare budgets and global austerity, full-service travel agency may seem a bit frivolous.\u00a0 And cost-conscious businesses are finding ways to reduce travel costs, both by traveling less (Skype conference call anyone?) and by using lower-frill airlines and hotels.\u00a0 I have no hard data on this, and I don\u2019t know if it is even tracked.\u00a0 But I\u2019ve observed on recent flights that Business Class has been noticeably devoid of suit-wearing gentlemen in their 40s and 50s\u2014what we might think of as \u201cthe business crowd.\u201d\u00a0 There are a lot more grey flannel suits in Coach Class these days.\u00a0 Again, no hard data here; just an observation.<\/p>\n

So Amex\u2019s decision to scale back its travel services may simply be an acknowledgement of changing times.\u00a0 But Amex has made some other moves recently that would seem to be chipping away at its high-end image.\u00a0 For example, the company partnered with Wal-Mart (NYSE:$<\/span>WMT<\/a>)<\/b>\u2014yes, Wal-Mart<\/i>, in launching a reloadable pre-paid card targeted at lower-income consumers who often have no access to the traditional banking system.<\/p>\n

Now, I have nothing against Wal-Mart. \u00a0It’s a fantastic company. \u00a0I own shares for myself and clients, and I myself have saved thousands of dollars over the years buying my sundries there.\u00a0 \u00a0But I can\u2019t escape the thought that Amex is going slumming.<\/p>\n

Amex should tread carefully here.\u00a0 What separates Amex from the Visa (NYSE:$<\/span>V<\/a>)<\/b> and MasterCard (NYSE:$<\/span>MA<\/a><\/b>) cards used by the lumpenproletariat \u00a0masses is the image of exclusivity.\u00a0 Amex doesn\u2019t sell financial services; you can get those from any bank down the street. No, Amex sells image<\/i>.<\/p>\n

And Wal-Mart prepaid cards might not quite be the best way to sell that image.\u00a0 Just sayin.\u2019<\/p>\n

Amex can never compete with MasterCard and Visa in the mass market, but it doesn\u2019t need to.\u00a0 The company has roughly an 8% market share based on cards in circulation, according to Card Hub<\/a>. \u00a0\u00a0Yet it has 23.8% of market share by purchase volume, barely 3% below MasterCard.\u00a0 There are a lot fewer Amex users, but collectively they spend a lot<\/i> more than the average credit card user.<\/p>\n

Unlike MasterCard and Visa\u2014which are payment networks <\/i>and not banks\u2014Amex is an actual financial institution with all of the assorted risks this entails.\u00a0 Not surprisingly, Amex trades at a substantial discount to its payment network rivals\u2014a forward P\/E of 12 vs. 19 and 20 for Visa and MasterCard, respectively.\u00a0 But given the higher credit quality of its borrowers, it trades at a premium to mass-market card issuers like Capital One (NYSE:$<\/span>COF<\/a>)<\/b>, which trades for just 8 times expected earnings.<\/p>\n

Based on the numbers, Amex is probably priced \u201cabout right,\u201d neither expensive nor cheap.\u00a0 But I am not a buyer at current prices.\u00a0 Amex seems like a company struggling to find its way in a changing market.\u00a0 A marketer of exclusivity has no business offering prepaid card at Wal-Mart.<\/p>\n

Disclosures: Sizemore Capital is long WMT.<\/p>\n

The post Is Amex Going Slumming?<\/a> appeared first on Sizemore Insights<\/a>.<\/p>\n

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