American Express is hurting because of junk-bond losses and the slowing economy. The junk-bond problems aren't a strategic weakness, instead presenting a onetime problem, but other parts of the company's business are slowing as well. At its credit card business, corporate spending has decreased as businesses tighten budgets. Investors beware: As the economy goes, so goes American Express.
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Financial services giant American Express (NYSE: AXP) this morning said first-quarter profits fell 18% year-over-year because of a slowing economy and losses on its junk-bond business. The company earned $538 million, or $0.40 per share, compared to $656 million, or $0.48 per share, in the year-ago period. That beat the Street's lowered estimate by a penny: Prior to warning, American Express was expected to earn $0.51 per share. Turning to the top line, total revenue gained 2.3% over the year-ago period to $5.38 billion. Revenue at the company's American Express Financial Services (AEFS) unit plummeted 21% year-over-year to $806 million. The company indicated its AEFS unit is slowing because of reduced asset management fees, lower sales of investment products, higher compensation for advisors, and deferred acquisition costs. Given the stock market's decline, that's not surprising. American Express was also forced to warn because of losses on its junk-bond investments, which have low credit ratings, are not available to all investors, and generally couple high risk with high reward. The company took a pre-tax loss of $185 million for the write-down or sale of junk bonds in the investment portfolio of its AEFS unit. That's quite an increase from the $18 million loss it reported in the year-ago period. Following junk-bond write-downs of $49 million in the fourth quarter, American Express indicated that weakness in that market would hurt earnings in the early part of 2001. According to the company, the write-downs prevent bigger losses than would occur upon maturation of a number of the bonds. American Express has no intention of ditching the junk-bond business, but does plan to reduce the size of its holdings. With $185 million in junk-bond losses, you've got to wonder where American Express has been putting its money. Its $3.5 billion junk-bond portfolio is hurting because of holdings in businesses that have fallen on tough times recently. Loews Cineplex Entertainment and United Artists Theatres, for example, have filed for bankruptcy protection. The portfolio has also been hit because of holdings in companies that filed for bankruptcy protection related to asbestos litigation. The company's junk-bond problems are far from a long-term strategic weakness, but instead present a one-time problem. Excluding its junk-bond problems, earnings would have been flat versus the year-ago period and that flat growth indicates other parts of its business are slowing. The company's Travel Related Services (TRS) unit had revenue of $4.47 billion, increasing a mere 8.2% year-over-year. TRS' revenue expansion points to growth in loans, higher billed business (or credit card volume), and additional cards. At its credit card business, consumer and international spending has held, but corporate spending has decreased as businesses tighten budgets because of the slowing economy. International and consumer business could fall next, as the slowdown extends its reach. Economic conditions leave American Express exposed to volatility. Investors beware: As the economy goes, so goes American Express. Another financial services company and Rule Maker holding reported earnings today: T. Rowe Price (Nasdaq: TROW) posted net income of $49.3 million, or $0.38 per share, compared to $75 million, or $0.58 per share, in the year-ago quarter. That fell two cents short of the Street's lowered estimate. Prior to warning, it was expected to earn $0.43 per share. Revenues fell to $280.5 million, from $316.3 million in the year-ago period, while assets under management (AUM) fell to $148.7 billion, from $185.2 billion. The stock market's decline has adversely impacted asset value and some investors have moved money out of equity funds into more conservative vehicles, such as bonds. T. Rowe Price has traditionally focused on "value stocks," which have done better than most in recent months, but it also has stakes in volatile sectors like tech. As its AUM balance drops, management fees follow. In short, like American Express, its business is hurting because of bear market conditions. The Rule Maker Portfolio team recently discussed both American Express and T. Rowe Price in its Motley Fool Rule Maker Top 25 report. The Rule Maker managers have covered a wide range of industries to find Rule Maker companies with repeat purchase businesses, growing sales, strong cash flow, and little debt. For those who are interested, the report is available immediately as an electronic download product. Mike Trigg doesn't plan on investing in junk bonds. To see his holdings, view his profile. The Motley Fool is investors writing for investors.
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