Amex Costco card seen as crown jewel worth at least 15 cents per share

American Express Co. risks losing at least 15 cents a share of 2015 profit if it fails to maintain a credit-card partnership that Costco Wholesale Corp. is said to be reconsidering, according to analysts' estimates.

The lender's exclusive role as the credit-card provider for Costco's U.S. stores may generate 20 cents to 30 cents of earnings per share next year, according to William Ryan at Portales Partners LLC. Morgan Stanley's Betsy Graseck estimates the portfolio could account for 15 cents to 19 cents. AmEx will earn $6.03 a share next year, according to the average of 27 estimates in a Bloomberg survey.

"The Costco relationship is one of the crown jewels of co- brand relationships," Jason Arnold at RBC Capital Markets said in a phone interview. "It's something that would be felt."

AmEx is under pressure to keep partnerships with Costco and JetBlue Airways Corp. as competition among banks and payment networks for co-brand deals intensifies and merchants seek better terms. Losing Issaquah, Washington-based Costco would hurt the lender's reputation, not just profit, Ryan said.

"There's the psychological impact of people trying to understand what happened and what else could be at risk," he said. "There's a lot of questions."

Costco, which is replacing AmEx in Canada at the start of next year, is considering a similar move in the U.S., people familiar with the matter told Bloomberg News last week.

'Costco Matters'

"U.S. Costco matters to AmEx, much more than the Canada Costco program," Graseck wrote Nov. 7, noting investors should expect the lender to compete for a new contract. AmEx has about $9 billion of loans to Costco customers, representing about 11 percent of the retailer's U.S. annual revenue, she said.

Elizabeth Crosta, a spokeswoman for New York-based American Express, declined to comment.

As both a card issuer and network, AmEx earns fees each time Costco customers use cards to make a purchase and from extending credit. Total billed business, a measure of customer card spending, rose 9.3 percent to $258.1 billion in the third quarter from a year earlier, AmEx said last month.

Ryan estimates Costco contributes as much as 2.5 percent of AmEx's billed business. Donald Fandetti, a Citigroup Inc. analyst, wrote that the partnership may generate as much as $45 billion of cardholder spending next year.

"It is premature to assume" that American Express will fail to renew the partnership, Fandetti wrote in a Nov. 6 note. "If they do lose the U.S. contract outright, it would certainly be viewed as a negative."

Card Fraud

A negotiating advantage for American Express is that its fraud rates are lower than competitors', Graseck said, noting that Costco hasn't suffered a fraud akin to those in the past year at Target Corp. and Home Depot Inc.

"That should count for something," she wrote.

While AmEx is poised to boost revenue for a fifth straight year in 2014, analysts estimate it will rise 2.5 percent, the smallest increase in that span. Adjusted revenue, excluding a business-travel unit that AmEx spun off, climbed 5 percent in the first nine months of the year, short of the firm's long-term target of 8 percent.

AmEx exceeded other targets and probably could boost revenue by abandoning some investments, such as those it's making in reloadable prepaid cards, Chief Financial Officer Jeff Campbell said on a conference call last month.

Lucrative Accounts

In September, Costco told customers it reached a deal with Capital One Financial Corp. and MasterCard Inc. for the retailer's co-brand credit cards in Canada, supplanting AmEx at the beginning of 2015. New York-based JetBlue also is soliciting bids to replace American Express as the airline's card partner, two people briefed on the matter said last month.

Co-brand accounts are lucrative because they typically carry annual fees and encourage customers to spend more by promising discounts or free trips. Retailers, airlines and hotels also are vying for better terms and opportunities.

"Just because a merchant decides to do a competitive selection doesn't mean they are dissatisfied -- they want to test the market to make sure they are getting the best deal," said Eric Marks, a managing director at Auriemma Consulting Group who has advised banks and merchants on co-brand deals. A retailer may explore financial benefits, marketing strategies or other opportunities, he said. "In a successful partnership, all sides have to win."

Co-brands account for about a third of spending on consumer credit cards in the U.S., according to Mercator Advisory Group. Visa Inc., based in Foster City, California, is the payments network for about half of the major co-brand programs, while MasterCard and AmEx have 39 percent and 12 percent, respectively, according to Mercator.

Other companies with AmEx partnerships include Delta Air Lines Inc., Starwood Hotels & Resorts Worldwide Inc., Hilton Worldwide Holdings Inc. and Daimler AG's Mercedes-Benz brand.

AmEx typically charges merchants higher fees than other U.S. networks and is accepted at fewer places than Visa and MasterCard, said RBC's Arnold.

"AmEx's fees are hard for merchants to eat," Arnold said. "If they can avoid it, they will. AmEx will try to continue the relationship at almost any cost."