This news item can teach students how news can impact stock prices while also furthering their understanding of how credit card companies make money.
First, let’s answer the question (from Fortune):
AmEx AXP -6.53% shares dropped to their lowest levels since mid-October on Thursday after the credit card company announced that its exclusivity deal with wholesale club retailer Costco is set to expire at the end of March 2016. The market reacted swiftly and sharply to the prospect of Costco no longer accepting AmEx cards. AmEx is currently the only credit card accepted by the retailer, which is one of the largest U.S. retailers with nearly 470 stores across the country.
One might ask, why is this such big news, after all Costco only has 470 stores in the US? How can this have such a dramatic impact on AMEX’s stock price? Well, it turns out that Costco’s AMEX cardholders like to spend lots of money (from WSJ):
The loss was unusually significant for the New York company, as Costco cards account for one out of every 10 AmEx cards in circulation and 20% of the company’s loan portfolio.
Wow! One of out every 10 AMEX cards is a Costco card and over 20% of their loan portfolio comes from Costco AMEX customers! Remember that when you don’t pay back your credit card in full every month that is considered a loan and the credit card companies charge interest on those loans (according to their 2013 Annual Report, AMEX’s net interest yield on that portfolio was 9.3%), so now we know that 1) Costco AMEX holders are very important and 2) AMEX is likely to see their profits drop (and that’s what shareholders really care about!) as these Costco AMEX card holders won’t be able to use their cards (and add to their loan balances) at Costco starting next year. 3) Interesting factoid: average Costco AMEX customer has income of $100K per year (Marketplace.org)
How much of the loan portfolio will they lose? Well, remember that Costco customers will still need to pay off their revolving balances so it’s not like AMEX will lose that 20% overnight. It is just that as Costco AMEX customers pay off their balances, they will not be increasing their AMEX balances and they may even switch to the new card company that Costco partners with (rumors have it that Capital One will be that card provider).
So, in a nutshell, AMEX’s stock price dropped due to an unexpected (the key here is that investors hate surprises!) loss of their largest customer. Not a good day to be an AMEX shareholder!