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 (AXP) (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.
(AXP) 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.
(AXP) 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.
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.
At the opposite extreme, it's all too easy to throw up your hands and accept defeat. Especially if you're in an industry, like finance or travel, that's taken a huge hit. Are you signaling to customers and workers there's nothing you or they can do? That your company is surviving day-to-day? That may be the reality, but it's hardly a confidence-booster.
Obviously, small businesses don't have to worry about shareholders or analyst recommendations. But think of stock prices as a popularity index: Investors buy the stock of companies they think will do well in the future. In the same way, customers want to spend money with a business they think will stick around, not a place hovering on the edge of extinction.
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