Jim Sinegal: We recently lowered our fair value for American Express (AXP), and the company's earnings this quarter illustrated a lot of the negative trends facing the company. First is the growing bargaining power of merchants. American Express lost its relationship with Costco (COST), prices are coming down across the board, and we're seeing a lot of other merchants very reluctant to pay the high fees that American Express has traditionally charged.
Second, we are seeing a proliferation of payment options. Whereas once people had cash, check, Visa (V), and MasterCard (MA), now there is Apple Pay, Google Pay, and there are private-label options like those offered by Target (TGT). That's a problem for American Express as it tries to maintain market share.
We are also seeing increased competition in the rewards space. A lot of the other big card issuers are now offering rewards at the same level as American Express. It's a traditional advantage in which the company is now having a tough time keeping up with peers. Finally, there's regulation around the world. It's affecting not only American Express but other issuers' ability to charge high fees.
That said, we think American Express does have a way to deal with this. It has access to a lot of cardholder data and a lot of merchant data. If it can manage to find a way to analyze that data, put it together, and create more customized and more unique deals for cardholders, that would be a great thing for the company and would allow them to maintain their pricing power. However, the clock is ticking, and they don't have a lot of time to do this because of all of the increased competition in this space.
So, with that as a background, we actually like Synchrony Financial (SYF) better than American Express. It's a former unit of General Electric (GE). The company offers lower prices to merchants, some of the same data capabilities that American Express has, and is trading at a very similar multiple to earnings. We think it's a similar business, actually, without a lot of the headwinds facing Amex.