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Why AmEx Activist Role Looks Limited, Likely Unsuccessful

American Express Co. (NYSE: AXP) may be a value trap, or in this case a ValueAct trap. After a 6% share price gain on Friday, on a down day in the markets, Nomura’s Bill Carcache thinks the excitement is premature here.

AmEx shares were up after reports that ValueAct took a $1 billion stake. As to why this is premature, Carcache just does not expect that activists will be able to make much of a campaign to implement changes to American Express’s longer-term strategy nor to its day-to-day operations.

Another observation is that American Express is currently challenged, but also that it is not really mismanaged. Adverse legal rulings now give merchants the ability to steer consumers away from American Express products. Also, the unexpected passing of Ed Gilligan and the loss of the Costco relationship (which Nomura says is due to fierce competition, and the company’s unwillingness to lose money just to keep that contract) have all culminated into a perfect storm.

Also running against an activist investor’s ability to make much change is that the American Express Network and Merchant Services businesses are just not separable. The report said:

AmEx’s greater than 30% returns on tangible common equity, industry leading capital return, best in class credit performance, and demonstrated ability to deliver positive operating leverage support the notion that AmEx is a well-managed organization, and we believe it’s on track to returning to 12% to 15% earnings per share growth by 2017. We see no one better suited to manage the company through this tumultuous period than Ken Chenault, and our discussions with investors lead us believe he has the broad support of the investor base.

Nomura said that AmEx’s top-line growth is the key challenge here, and this is not something that activists can easily fix. Carcache ended noting that activists will sniff around here but will end up walking away. He said:

Ultimately, we come back to our view that American Express is a well-run, shareholder friendly organization that will not benefit from activism. Instead, we view activism as more of a potential distraction, and would rather see the management team focus on overcoming the slew of challenges that have hit the company in recent months.

Nomura has a Neutral rating and an $82.00 price target. AmEx shares were down under $75 just last week. Then the ValueAct stake took shares to $79.72 on Friday. Shares were last seen at $81.15 on Monday after rising another 1.8%.

American Express has a consensus analyst price target of $85.84 and a 52-week range of $74.30 to $94.89.

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By Jon C. Ogg


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