American Express Stock Faces Challenges Going Into Q1 FY 2016 Earnings

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On April 20, global credit card service company American Express (NYSE:AXP) is scheduled to report its Q1 FY 2016 earnings. Average analyst estimates for revenue come in at $8.08 billion. Moreover, the average analyst earnings per share (EPS) come in at $1.34 per share. This represents a YoY top line improvement of 1.6%, and an EPS contraction of 9%, if American Express at least meets these estimates. Wall Street’s sentiment that led to these estimates is right on par with the challenges that American Express is facing. Let’s examine.

Fundamental Decline

American Express beat analyst expectations in the most recent quarter, only for the stock to tank on weaker guidance. However, just because a company beats expectations doesn’t necessarily mean that its fundamentals expanded. It’s necessary for potentially successful investors to dig deeper. In FY 2015, American Express saw its revenue, net income and free cash flow decline 4%, 12% and 2%, respectively, YoY.

Adverse foreign currency translations had a hand in this. More notably, increasing competition and changing consumer patterns enabled by technology, have had a negative impact on the American Express’ business. Payment processors such as Apple (NASDAQ:AAPL) Pay make the American Express card look like the Model T. All of these factors made analysts downbeat over the course of the quarter. Over the past 90 days, average analyst estimates went from $1.39 per share to $1.34 per share representing a 3.6% decline. The strong dollar will also likely weigh down American Express’ fundamentals during the quarter.

American Express exudes conservatism in its dividend payouts. Last year, the company only paid out 12% of its free cash flow in dividends. Impressively, American Express yields 2%. This gives an indication that American Express understands the importance of cash flow to its business.

Commoditization

Technology disrupts industries and payment processing is no different. Basically, money represents a commodity. It can exist digitally or physically. Cashless transactions are on the rise, attracting new players to the payment processing arena. This means that differentiation comes from pricing, making branding difficult. Costco's (NASDAQ:COST) notable departure from American Express, which once had branding power, due to its high merchant fees gives evidence of its fading brand power.

Moving To Adapt

American Express understands that it needs to adapt. Recently, the company announced the Amex Express Checkout, which is a Paypal Holdings (NASDAQ:PYPL) like service. Fellow Amigobulls writer, Brian Wu noted that American Express could utilize its card network in the implementation of this new program. This represents a far more likely scenario than a merger with PayPal. However, the combination of a merger with PayPal along with American Express’ new checkout initiative would go a long way in making American Express a payment processing leader.

Concluding Thoughts

American Express should beat low analyst expectations. However, investors should be mindful of the highly likely possibility of further fundamental erosion. If it can’t figure out a way to meet competitive challenges, American Express and its shareholders may not survive. Currently, the company’s balance sheet resides in good shape and should make meeting challenges easier.