In an interview last year with CNBC, Warren Buffett (Trades, Portfolio) offered his view on American Express (AXP, Financial).
In this interview, Buffett played down American Express' ending its relationship with Costco (COST, Financial) and the loss of litigation with regard to customer steering. Buffett even suggested that the loss of the Costco account may not be a bad thing and said he loved the fact that American Express kept buying back its own stock.
While it's tempting to follow Buffett's opinion on American Express, there are many questions that every serious potential shareholder should answer before initiating a position. Below are a few of my questions.
- How does AmEx compete in the co-brand world? What can AmEx offer that Visa (V, Financial), MasterCard (MA, Financial) and their issuer bank partners can’t in the co-brand space?
- Why is the loss of the Costco account not a bad thing for AmEx?
- Why does AmEx have more affluent and better credit quality customers? How can AmEx have a spend-centric model whereas Visa, MasterCard and Discover (DFS, Financial) can’t?
- How can AmEx balance the need to grow merchant base and maintain its brand power without jeopardizing its relationship with current merchants and its brand name?
- Can AmEx establish a partnership with Visa and MasterCard’s issuer partners such as Citi (C, Financial) and Chase (JPM, Financial) to expand its revenue source while maintaining the integrity of its closed-loop system? If so, what are the consequences and implications?
- Airlines and hotels used to be attracted to AmEx’s more affluent customer base so AmEx did put something on the table years ago. As the customer base of Visa and MasterCard becomes more affluent and more brand-agnostic, what are the incentives to keep the relationship with AmEx?
- In the card business, what benefits can AmEx offer to its merchants that Visa and MasterCard can’t?
- Why do initiatives such as OptBlue and Bluebird make sense?
I seem to have found the answers to some of the questions above. At the same time I'm also struggling to find answers to others. While it is a very challenging task, we need to answer those very important qualitative questions before making a decision. Buffett surely has thought about them, and I suspect even for him the answers don't come easily.
