Shares of American Express Co. fell Monday after the company reported an 18% decline in first-quarter profits as a result of weakness in its financial advisory unit and warned of lower-than-expected profit growth in the near term.
Net income was $538 million in the first quarter, or 40 cents per share. The company said it is unlikely to achieve previously expected 12% earnings per share growth because of weakness in the economy and equity markets. American Express had warned about the first-quarter profits slump earlier this month. Net revenues were up 2%, to $5.4 billion, but a 79% decline in net income in the advisory business pulled earnings down.
Describing the quarterly results as clearly disappointing, Gary L. Crittenden, chief financial officer of American Express, cited a $182 million loss from the writedown and sale of high-yield securities and a 7% decline in management and distribution fees. Without the losses from the sale of the high-yield investments, earnings per share would have risen 2% from the first quarter of last year, he told investors in a conference call.
Bradley Ball, an analyst at Prudential Securities, said that though the performance was expected he was initially somewhat surprised by the magnitude of the writedowns in the securities portfolio. "This just reflects that the strength of American Express' business still remains vulnerable to market cycles," he said.
Net income from travel-related services rose 16%, to $522 million, and banking income rose 22%, to $9 million. Spending by corporate cardholders slowed and dragged the overall growth in billed business and cards in force, the company said. Total billed card business amounted to $74 billion, up 8%, and basic cards in force totaled 41.3 billion, up 11%.
Marketing and promotion expenses fell 10%.
"There were good sides and bad sides to the earnings," said Kenneth A. Posner, an analyst with Morgan Stanley Dean Witter & Co. "Chargeoffs and delinquencies were weaker than expected, and reserves were strong," he said. But he was less pleased with the cut in marketing expenses: "We hate that, because it always has negative implications for future growth.".
Analysts said that they were impressed by the ability of American Express' management to save overall costs and by the company's progress in its reengineering efforts. But they agreed that the next quarters could be messy.
"The market has confidence in the management, but the uncertainty remains," Mr. Ball said.
Mr. Posner warned that the consumer side of the business in particular will begin to suffer from the economic downturn, while existing weaknesses will not improve to offset that new threat.
"The consumer credit cycle has just started," Mr. Posner said. Coupled with weaknesses in the international economy, that could mean difficult times for American Express.
On Monday, American Express fell 2.4%, while the overall market remained in the red. The American Banker index of 225 banks lost 1.6%, and the Standard & Poor's 500 1.5%. The Nasdaq composite was down 4.8%.