American Express Turns to Cost-Cutting as Growth Slows

Wide-moat

Management expects the discount rate to decline further in 2016 due to its OptBlue rollout, competitive pressures, and international regulations. This expectation is consistent with our thesis and forecasts. Troublingly, we see American Express' reputation for superior service as a key source of its economic moat, but the intangible asset is becoming more expensive to maintain. Card member services expense rose by 24% from the prior year as the company spent more on cobranding partnerships.

We speculate that activist involvement in the company could be responsible for the renewed emphasis on cost-cutting, including the shutdown of the enterprise growth division. We think that management understands the changing dynamics in the payment space well--and that the closed loop connections to merchants and cardholders have value--but we'd like to see more specific initiatives around the use of big data gathered from the closed loop before penciling in additional growth. In any case, we don't expect to see much benefit from additional revenue or reduced costs until at least 2017.

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