AXP American Express Company

By Aaron Back 

The writing is on the wall for American Express, but investors can't see it. Like a lifelong Platinum-card holder oblivious to the better options now available, the company's investors are oddly unconcerned about worsening competition.

It has been clear for some time that the competitive environment in credit cards is intensifying. The nation's biggest banks like J.P. Morgan Chase and Citigroup are offering more generous travel rewards or cash back. The value proposition on many AmEx cards simply doesn't match up anymore.

Fighting back will have costs. In the fall, AmEx moved to upgrade the travel rewards on its flagship Platinum card, by moves such as offering quintuple points on airfare. But even this enhancement left the card's travel rewards rate far less generous than the Chase Sapphire Reserve card, according to Barclays analysts.

This competitive pressure started to show up in AmEx's fourth quarter results. Net income fell by 8% from a year earlier to $825 million. Earnings per share, adjusted for restructuring charges, was well below expectations.

Marketing and promotion expenses rose by 35% from a year earlier to $1.21 billion in the fourth quarter. The company attributed this in part to marketing initiatives for the Platinum card. Rewards for card members declined by 2% from a year earlier, but Chief Financial Officer Jeffrey Campbell said this was due to the sale of the Costco card portfolio to Citigroup in June. Adjusting for this, rewards costs actually rose 13%.

Most credit card lenders can afford generous benefits because they make money back over the long run on high interest rates. AmEx's high-end cards generally don't carry balances month-to-month, though. Combined with the high-yield savings accounts the company offers, this makes AmEx a net loser from higher rates, Mr. Campbell said. An immediate one-percentage point rise in rates would cost the company around $200 million a year, he said.

The company issued reassuring guidance, saying it expects earnings per share of $5.60 to $5.80 this year, up from $5.65 in 2016. But the company also said it expected to be able to "moderate" marketing spending this year. Credit Suisse analyst Moshe Orenbuch wrote in a note this "may be difficult to achieve" given the competitive environment.

Despite all this, AmEx shares are up by around 20% over the past year and retreated only slightly on Friday morning after the earnings miss. But the company is clearly in a very tight spot. It is time for investors to wake up to the company's risks.

Write to Aaron Back at aaron.back@wsj.com

(END) Dow Jones Newswires

January 20, 2017 13:01 ET (18:01 GMT)

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