Investors grit their teeth whenever a financial company gets ready to release earnings these days. By now, it's a given the news is going to be bad. The only question is, how bad?
It wasn't shocking this week when American Express (Stock Quote: AXP) announced that fourth-quarter earnings fell 72%. The surprise came from Wall Street's reaction: Because the figure wasn't as dismal as expected, AmEx's stock jumped more than 10% over the next few days.
The lesson? When your industry is being pummeled, it pays to lower expectations. The challenge is to avoid drifting into defeatism. It's one thing to acknowledge that you're facing challenging times. But if you want customers and clients to stay loyal, you'll have to show them you're not throwing up your hands and waiting things out.
These are bleak times for any financial company, and American Express was expected to be hit hard. For one thing, the company depends on credit-card spending, and anyone who's looked at the latest retail numbers knows shoppers have been avoiding malls and department stores. AmEx also specializes in travel, another sector that's been hurt.
So it seemed like a given that AmEx's fourth-quarter results would be awful. And yes, the report showed that the average card member was spending 13% less, while charge-offs due to bad loans rose and are expected to keep going up through 2009.
But that bad news was balanced by the steps AmEx took to stay afloat. In November, it became a bank holding company to access the government's TARP funds. It slashed marketing costs and card-member-reward expenses by a third. Although net income tumbled from $831 million a year earlier to $172 million, the company was able to say it ended the year with a profit.
In a statement, CEO Kenneth I. Chenault said: "Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades. Nevertheless, we met our near-term goals: staying liquid, staying profitable and investing selectively to strengthen our competitive position over the longer term."
One stock-price bump doesn't mean AmEx is out of the woods -- far from it. Ever since the demise of Bear Stearns and Lehman Brothers, no financial company seems entirely secure. But the company is managing expectations wisely, something small businesses should strive to do, too.