Decline in Q3 revenue turns AMEX weak

Following the report of fiscal 2016 third-quarter results that went past the analysts’ estimates, the share price of American Express Company (NYSE: AXP) rallied to close at $72.42 on Monday.

The reaffirmation of fiscal 2017 outlook and the raise in the full year 2016 earnings per share view also aided the rally in the stock.

While many believe that the stock will rally further, there are indications that the stock would undergo a temporary correction due to the details provided underneath.

The New York-based financial institution reported third-quarter profit of $1.142 billion, or $1.20 per share, on revenue of $7.774 billion, compared to profit of $1.266 billion, or $1.24 per share, on revenue of $8.193 billion in the corresponding quarter of fiscal 2015.

American Express

Excluding restructuring charges and tax impact, the adjusted third-quarter earnings per share was flat at $1.24, compared to the prior year, but higher than the analysts’ estimate of $0.97 per share.

For the full year 2016, the company raised its earnings per share guidance to a range of $5.90 to $6 per share, from the prior view of $5.40 to $5.70 per share. The non-GAAP earnings are forecasted to be between $5.65 and $5.75 per share. American Express also confirmed its fiscal 2017 earnings per share guidance of $5.70 per share.

It can be noted that last year American Express lost its 16 year old partnership with membership-only warehouse club Costco and the former is trying to rebound from the fatal blow on its revenue stream. The 11 million customers of Costco accounted for 10% of American Express’ clients and 20% of its loans.

The negative impact of the loss of Costco’s business was clearly seen in the segment wise results. The US Consumer Services segment reported a 26% decline in the Q3 income to $401 million. The International Consumer and Network Services segment reported marginal growth of $1 million in the third-quarter income to $155 million, compared to last year. The Global Commercial Services segment posted flat third-quarter net income of $466 million, compared with the similar period last year. The Global Merchant Services announced a 10% decline in the third-quarter income to $359 million.

As it can be understood, American Express does not anticipate any increase in the earnings in the fiscal 2017. To offset the loss of revenues, the company increased the marketing expenses by about $200 million in 2016. The investors are yet to see the manner in which the company is going to compensate for the revenue loss. This being the case, fundamentally, we can argue that the stock has already priced in the raise in earnings issued by the management. So, we anticipate the stock to decline soon.

Apart from a near vertical rise of the stock in the last few days, a technical gap, which developed in the second-half of last month, indicated by blue circle, still remains to be covered. The high ninety readings of the stochastic oscillator is also pointing to an overbought scenario. Thus, we believe that the stock would come down to fill the gap soon.

So, a trader can speculate on the downtrend by purchasing a one touch put option from any of the reputed binary brokers listed in this website. The target price for the put option should be greater than $65. Finally, to give adequate time for the stock to decline and violate the desired level, the trader should make sure that the put option remains active until the December 15.