Costco Aside, American Express Still Expects to Grow

One of the pioneers of the charge-card industry was American Express , which turned its membership-based card into a status symbol that for decades symbolized wealth and power. More recently, though, American Express has faced heavier competition from larger card-network rivals, and episodes like the recent loss of its exclusive arrangement with warehouse-retail giant Costco Wholesale have some shareholders questioning whether AmEx can sustain its pace of growth over the long run. On Thursday, investors will get some answers when AmEx releases its first-quarter financial report. Let's take a sneak peek at what we're likely to see from American Express and what shareholders should expect for the rest of 2015 and beyond.

Stats on American Express

Source: Yahoo! Finance.

Will American Express get back on the right track?Investors are clearly jittery about American Express and its prospects for strong earnings, with their expectations for the first quarter having fallen by more than a dime per share in just the past few months. Their views on full-year 2015 and 2016 earnings have been even darker, with next year's earnings projection down by nearly $1 per share. The stock has suffered as a result, dropping 12% since early January.

American Express took a one-two punch during the past few months that sent its stock for a loop. In mid-January, AmEx's fourth-quarter earnings report seemed reasonably positive on its face, with sales growth of 7% helping push net income upward by 11%, but rising expenses in the company's key U.S. card-services unit raised worries of growing competition in the market for upper-end cardholders. Then, even worse, American Express announced that Costco had chosen not to renew their exclusive card arrangement,meaning AmEx will lose that business early next year. Given that Costco AmEx cards make up about 10% of all American Express cards in circulation, the company will need time to absorb and recover from the resulting hit to earnings.

The loss of Costco's business produced such a dramatic drop for the company because, unlike most of its card-network rivals, American Express acts both as issuer and transaction processor for its cards. In other words, American Express doesn't share revenue with a separate issuing institution, so it can pocket whatever spreads it can negotiate between what it pays merchants and what it receives from customers. Losing volume therefore has a disproportionately large impact on AmEx compared to what other card companies would suffer.

American Express has also taken steps to find new avenues for growth. Earlier this month, the company announced a deal with brokerage company Charles Schwabto provide a co-branded card for Schwab's brokerage customers. Given the affluence and size of Schwab's client base, the deal puts American Express back in its groove of catering to cardholders who can afford to spend without facing any substantial amount of credit risk.Still, credit conditions remain favorable for American Express, and that should allow the company to be a bit freer in accepting new card members who might otherwise be greater credit risks. Favorable trends in the U.S. economy have kept default rates much lower than they were during the financial crisis, and (for now at least) steady economic growth should keep supporting minimal credit-related losses for American Express.

In the American Express report, be sure to look at management's comments about the loss of Costco's business. Even after taking that hit, American Express has the brand awareness and marketing expertise to make its cards attractive to a wide range of prospective customers. If it can do so, then it could in time make up for the loss of business from Costco members.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends American Express and Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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