American Express(NYSE: AXP) has been one of Warren Buffett-led Berkshire Hathaway's (NYSE: BRK-A)(NYSE: BRK-B) stock holdings for some time, but its performance lately hasn't been stellar. Even after a recent rebound, shares are down nearly 20% over the past year as a result of losing its Costco partnership and a few other negative developments. However, Buffett defended his Amex investment at Berkshire's annual meeting, and I think he's got a good point.
American Express' troubles
The biggest reason for American Express' decline is the loss of its relationship with Costco, which made up about 8% of Amex's total card spending in 2015. In addition, AmEx's co-branding deals with JetBlue and Fidelity ended, and although this was a much smaller piece of the company's revenue, it's still a significant setback. There's also the looming threat of losing the Starwood Hotels partnership, as well, once the hotel company is acquired by Marriott, which has a co-branding deal with Chase.
Competition in the credit card business has never been higher. Banks are offering unprecedented introductory bonuses and 0% APR deals to attract customers, and this could create a problem for AmEx, which will have to offer its own attractive incentives (read: "spend more money"), thereby cutting into its profits.
Buffett still loves American Express
American Express is one of Berkshire's "big four" stock investments, and the company's stake now represents 16% of the credit card giant.
At Berkshire's annual meeting in late April, Buffett said American Express' business model is "under attack," although it's not enough to get him to sell. He called American Express an attractive business and said he is happy with the company and still likes the stock as an investment.
Buffett has repeatedly praised American Express' talented, shareholder-friendly managers, who return tons of cash to investors in the form of dividends and buybacks. I really can't stress enough the value Buffett places on great management -- he believes the right management team can add billions to a company's intrinsic value. Buffett also loves AmEx's rock-solid brand and ability to generate cash.
A great value and a durable competitive advantage
Admittedly, it will take some time to replace the Costco revenue, but the company plans to trim expenses by about $1 billion this year to help make up the difference.
Additionally, AmEx has had some interesting positive developments lately, including a deal with Sam's Club to start accepting the company's cards. AmEx is increasing its product offerings and pushing for more merchants to accept its cards, hoping to be as universally accepted as Visa and MasterCard products by 2019. AmEx has increased its marketing and promotions spending by 19% during the first quarter, so it's not taking its challenges lightly.
Results are promising so far. During the first quarter of 2016 the company increased its number of issued cards by three million, and increased revenue by 4% on a constant-currency basis. And, when you exclude the Costco and JetBlue portions of the portfolio, AmEx's loan portfolio actually grew by 11% over the past year.
American Express has the competitive advantage of a strong brand and an affluent, attractive group of cardholders, which allows it to charge merchants more for payment processing than rivals Visa and MasterCard. In fact, one report found that AmEx cardholders spend an average of 71% and 60% more than Visa and MasterCard customers, respectively. And, AmEx's widespread closed-loop network allows it to consistently deliver a return on equity in the 25% range.
Also, there is the global trend toward a cashless society, which benefits the entire payment processing sector.
Stick with AmEx
The bottom line is that although revenue will certainly suffer in the short term, American Express is likely still a long-term winner, and I believe investors with the stomach to make it through the in-between time will be handsomely rewarded.
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Matthew Frankel owns shares of American Express, Apple, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple, Berkshire Hathaway (B shares), Costco Wholesale, Facebook, Marriott International, MasterCard, and Visa. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days.
Investor Warren Buffett answers reporters' questions during a press conference to announce that Walt Disney will buy Capital Cities/ABC July 31.
Billionaire investor Warren Buffett of Omaha makes a rare public appearance during an autograph session outside Borsheim's Jewelry Store in Omaha, May 4. Buffett was signing autographs for shareholders in his company, Berkshire Hathaway, which is having its annual meeting May 5.
Billionaire businessman Warren Buffett sits with his wife Susan (R) and daughter Susie, prior to the annual Berkshire Hathaway shareholders meeting in Omaha, May 5. This marks a rare public appearance for the reclusive Buffett.
Arnold Schwarzenegger, Republican candidate for governor of California
in the October 7, 2003 recall election listens as world famous
investor, Warren Buffett (L), one of his financial advisors, speaks to
reporters after a meeting of Schwarzenegger's Economic Recovery Council
in Los Angeles August 20, 2003. REUTERS/Fred Prouser
Billionaire financier Warren Buffett looks on after a meeting with U.S. Senator Arlen Specter (R-PA) and chairman of the Senate Judiciary Committee, at the Hart Senate Office Building on Capitol Hill in Washington June 29, 2005. Specter is the co-author of a bill seeking to create a $140 billion asbestos compensation fund. REUTERS/Shaun Heasley SH/TC
Billionaire Warren Buffett arrives at the Sun Valley Resort in Sun Valley, Idaho July 10, 2007. The world's biggest media chiefs gather this week at the 25th annual Allen & Co. conference at the resort starting today. REUTERS/Rick Wilking (UNITED STATES)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at a Senate Finance Committee hearing about "Federal Estate Tax: Uncertainty in Planning Under the Current Law" on Capitol Hill in Washington, November 14, 2007. Billionaire Buffett warned of widening U.S. income disparity and endorsed the estate tax as a check on wealth accumulation, while two senior lawmakers said they want the tax repealed. REUTERS/Jason Reed (UNITED STATES)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett greets shareholders during the Berkshire Hathaway Annual Shareholders meeting in Omaha, Nebraska May 3, 2008. REUTERS/Carlos Barria (UNITED STATES)
Billionaire investor Warren Buffett laughs as he appears with Microsoft Corporation founder Bill Gates for a town hall style meeting with business students broadcast by financial television network CNBC at Columbia University in New York, November 12, 2009. REUTERS/Mike Segar (UNITED STATES BUSINESS)
Berkshire Hathaway Chairman Warren Buffett kisses his ukulele at the Berkshire Hathaway annual meeting in Omaha May 1, 2010. Buffett played "I've Been Working on the Railroad." REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS TRANSPORT)
Billionaire financier and Berkshire Hathaway Chief Executive Warren Buffett (L) and Microsoft founder Bill Gates gesture at the national launch ceremony for the BYD M6 vehicle in Beijing September 29, 2010. Chinese battery and car maker BYD, backed by Buffett, launched its first premium multi-purpose vehicle (MPV) in Beijing on Wednesday to tap rising demand in the world's biggest auto market. REUTERS/Jason Lee (CHINA - Tags: TRANSPORT BUSINESS)
Billionaire Warren Buffett, wearing a traditional tikka or a red mark on the forehead, speaks during a news conference in Bangalore March 22, 2011. Buffett on Tuesday said he is looking to invest in large countries like India, China and Brazil, but added that restrictions on foreign ownership in India's insurance industry could be a deterrent. Buffett also said and the U.S. economy was improving and that the devastating earthquake in Japan would not hurt global growth. REUTERS/Stringer (INDIA - Tags: BUSINESS)
Berkshire Hathaway Chairman Warren Buffett tours the floor of the New York Stock Exchange September 30, 2011. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)
Berkshire Hathaway chairman Warren Buffett holds his hand over his heart during the singing of the national anthem, at the start of a 5km race sponsored by Brooks Sports Inc., a Berkshire-owned company, in Omaha May 5, 2013, a day after the company's annual meeting. Buffett at the meeting on May 4, 2013 gave the most extensive comments to date about the future of Berkshire Hathaway Inc after he is gone, saying he still expects the conglomerate to be a partner of choice for distressed companies. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS SPORT ATHLETICS)
Warren Buffett, Chairman of the Board and CEO of Berkshire Hathaway, poses for a portrait in New York October 22, 2013. REUTERS/Carlo Allegri (UNITED STATES - Tags: BUSINESS)
Roberta Buffett Elliott sits with her brother Warren Buffett as they attend an announcement ceremony at Northwestern University in Evanston, Illinois, January 28, 2015. The sister of financial investor Warren Buffett has given Northwestern University more than $100 million to create the Roberta Buffett Institute for Global Studies, the largest single gift in the school's 164-year history, the university said on Wednesday. REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS EDUCATION SOCIETY)
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women's Summit in Washington October 13, 2015. REUTERS/Kevin Lamarque/File Photo
Warren Buffett, chairman and CEO of Berkshire Hathaway, smiles before speaking with Bill Gates (not pictured), at Columbia University in New York, U.S., January 27, 2017. REUTERS/Shannon Stapleton