Investor concerns about earnings volatility continue to hang over Bankers Trust New York Corp., to the frustration of some of the company's boosters on Wall Street.
"Every time I talk to investors, that issue typically comes up," complained Raphael Soifer of Brown Brothers Harriman & Co. The stock, he added, is "substantially undervalued."
But Mr. Soifer and others think those concerns eventually will be allayed, setting the stage for a significant appreciation in Bankers Trust's share price.
This week, Merrill Lynch & Co. analyst Judah Kraushaar reiterated a long-term "buy" recommendation on the stock.
$100-Plus Target Price
By yearend 1994, Bankers Trust should be trading at more than $100 a share, Mr. Kraushaar said.
Thursday, the stock closed at $75.125 a share, down 50 cents.
Investor concerns about earnings volatility stem from the fact that two businesses -- trading and positioning, and client risk management -- account for most of Bankers Trust's income.
Among other things, some investors are concerned about the predictability and sustainability of these earnings streams, which produced record results in the third quarter at Bankers Trust.
Widely considered the leading developer of exotic derivative products, Bankers Trust is at the cutting edge of the risk-management business.
Fear of Swaps, Options
Derivatives, though, remain a mystery to some investors, and that "fear of the unknown" is hurting Bankers Trust's stock price, Mr. Soifer said.
At the same time, assets and liabilities in trading and risk management are marked to market daily, giving rise to a perception of volatility, he added. Over the course of a year, though, that volatility tends to smooth itself out.
Indeed, for the past 10 years, Bankers Trust's annual earnings have been less volatile than those of most other money-centers, leading superregionals, or investment banks, Mr. Soifer said in a recent research report.
The same can be said of J.P. Morgan & Co., another leading player in the risk-management business. Both bank companies also produce superior returns on equity, Mr. Soifer noted.
Marketing to the Skeptics
Ironically, Bankers Trust and Morgan -- as well as others -- are now aggressively marketing to institutional investors the very derivative products that are the source of concern about earnings volatility.
"Over time, I'm convinced portfolio managers will have to make far greater use of derivative products in their own business to remain competitive,"
Mr. Soifer said. Bankers Trust is also said to be planning a series of meetings with analysts in coming months to discuss how its trading and derivatives businesses are accounted for.
Under generally accepted accounting principles, or GAAP, Bankers Trust is required to break down its revenue from these businesses in ways intended more for traditional commercial banking activities, Mr. Soifer said. That makes it difficult to assess the businesses just from published financial statements, he added.