American Express feeling pinch from economy, analysts say

Apr.25, 2008 in Market Outlook

American Express feeling pinch from economy

Profit down 6%, not as steep as forecast

By Riley McDermid, MarketWatch

Last Update: 9:08 AM ET Apr 25, 2008

NEW YORK (MarketWatch) — American Express is feeling the pinch from a worsening
U.S. economy as financially stressed consumers make fewer payments less often,
analysts said Friday.

The credit card giant reported Thursday that first-quarter profit fell 6% to $991
million, or 85 cents a share, from $1.06 billion, or 87 cents a share, in the
year-ago period.

New York-based American Express (AXP) reported income from continuing operations
of $974 million, or 84 cents a share. Revenue rose to $7.19 billion vs. $6.48
billion a year earlier.

Analysts polled by Thomson Reuters had expected, on average, earnings of 81 cents
a share for the quarter, on revenue of $7.34 billion.

Shares of American Express, which is a component of the Dow Jones Industrial
Average, were trading up about 3% in pre-market action.

Lenders across the spectrum have been hit hard by a combination of slowing
economic growth and rising debt delinquency rates as consumers attempt to control
mounting debt.

American Express saw its charge-off rates and delinquencies rise, as customers
who are paying down their balances are doing so with less frequency and in
smaller amounts. Delinquencies of more than 30 days rose to 4.1% and charge-offs
in the U.S. were up to 5.5% of loans from 4.3% last quarter.

It also upped its provisions for losses in its U.S. card services by 52% to $881
million, up from $581 million a year ago.

But the company had some growth in other areas and said card-member spending rose
14% for the first quarter. Its international profits rose to $133 million, up 30%
from a year earlier, as it continued to do strong overseas business.

Indeed, growth in its international customer base nearly tripled in the first
quarter, compared to its domestic portfolio.

But write-offs in worldwide lending, too, leapt to $1 billion from $813 million
in the fourth quarter and from $628 million a year ago. Managed worldwide lending
reserves rose to $2.8 billion as of March 31, up from $1.79 billion a year ago
and $2.58 billion at the end of the fourth quarter.

Analysts said the trend of writing off more debt and simultaneously shoring up
loan-loss provisions will continue as the international consumers feel the ripple
effect from a recessed American economy.

“The economic backdrop for credit card issuers is getting worse, as higher loan
losses correlate closely with higher unemployment,” Bradley Ball, an analyst for
Citigroup, wrote in a research note.

Ball maintained his hold rating on the stock, saying that although American
Express has done a good job riding out the turmoil in the markets thus far, it
could face further credit pressures.

“Although we continue to expect AXP to weather the current consumer credit
headwinds better than most, we think the stock is likely range-bound for now
given greater risk of a near-term EPS shortfall,” Ball said.

American Express also had some significant unusual items in its earnings
statement including reengineering costs of $10 million pre-tax, a $22 million
pre-tax charge related to the exit of American Express Bank operations that were
not sold and losses related to mark-to-market sales of the remaining American
Express International Deposit Company investment portfolio.

The company also received a $70 million pre-tax boost from Visa’s (V) recent
initial public offering.

Still, despite one-time charges and a trickier credit environment, American
Express’ main virtue to investors might be its ability quickly divest of riskier
investments, an agility that analysts laud.

“The company clearly has significant flexibility in the timing and magnitude of
its investments in marketing, personnel, products and infrastructure,” said David
Hochstim, an analyst for Bear Stearns, in a research note. “[American Express]
could decide to increase or decrease its investments as it acts to balance its
desire for high rate of returns on capital over time and its goal of 12% to 15%
EPS growth.”

Nonetheless, Hochstim lowered his estimates for American Express in coming
quarters slightly, on concerns that no matter how flexible the card company is,
it still remains dependant on a shifting economy.

“American Express’ 2008 earnings remain vulnerable to further economic
deterioration and [its] shares could decline further if estimates are reduced,”
Hochstim said. “But if the current economic downturn does eventually end and
investors again focus on the company’s well above industry earnings growth and
returns on equity, we expect AXP shares to rise significantly,”

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