American Express (AXP) CEO Ken Chenault simply hasn't been able to meaningfully convince investors the company can live without Costco (COST) -- but does that mean it can't stand on its own without a merger?
Many investors have grown impatient with Chenault's turnaround strategy, especially after the shares have tanked in the face of repeated portrayals of the loss of co-brand partner Costco as a mutual falling out.
And recent reports from Fox Business that Wells Fargo (WFC) could be a potential bidder for the New York-based credit card giant appear to be overblown, according to Jack Mohr, co-manager of Jim Cramer's Action Alerts PLUS charitable trust. (Wells Fargo is among the members of the charitable trust.)
"Wells Fargo is a high-quality and well-managed, large-cap, diversified, yet domestic bank that has numerous levers to pull on in order to drive earnings growth amid the difficult backdrop weighing on bank revenues," he said in a Tuesday email. "The question is not whether it has dry powder at its disposal (it does), but which form of capital deployment maximizes shareholder value."
And even though American Express is trading down 26% over the past 12 months, Wells Fargo analysts recently reported an acquisition is most likely to be made by AmEx, not the other way around, especially given significant cash on hand and need for business growth. (AmEx also announced it's losing its branded partnership with Fidelity in January, after the financial services parner decided to part ways for Visa (V) rewards cards issued by U.S. Bancorp (USB).)
"While the loss of Costco will pressure the firm's growth prospects in 2016-2017, we estimate roughly $2 billion of excess capital could be generated by the portfolio sale, which AXP intends to incorporate into its 2016 Comprehensive Capital Analysis and Review submission," Wells Fargo analysts Jason Harbes and Matthew Burnell said in a recent report. "Additionally, we believe AXP is more interested in making an acquisition over the next two years than it has been in recent years, although we sense a bolt-on acquisition such as Loyalty Partner (acquired in 2011 for $0.6 billion) that offered potential synergies would be of greater interest than a large transformational deal."
And there is also little value on Wells Fargo's end, as the already well-diversified mega-bank would be better served focusing on its stable deposit base, substantial profit-churning model, and redeploying cash into dividend increases, according to Mohr, who said he'd prefer seeing more accretive acquisitions from Wells, such as the $30 billion portion of GE Capital's loan portfolio that Wells acquired in October.
"As for AmEx, we sold the name in the portfolio roughly a year ago given our concerns around major partnership attrition (losing Costco's business spurred a 'domino effect' of defections), which we believe reflects structural cracks in the company's once-immutable business model," he said. "The competitive landscape has shifted; issuers and networks alike are increasingly willing to invest heavily in customer acquisitions (via generous rewards programs and sign-up offers) -- despite the low rates of return -- which weighs heavily on AmEx's ability to compete while preserving returns."
Mohr added that Chenault clearly has an urgent need to begin staging a turnaround, but will likely find itself on the "wrong end of the negotiating table" in merger talks with a comparatively more stable giant like Wells Fargo.