Metris Rises with Market Despite a Tepid Rating

Shares of credit card issuer Metris Cos. gained Monday, overcoming a lukewarm endorsement from a Wall Street analyst and rallying in tandem with other financial stocks.

Filling a hole in his list, analyst Michael J. Freudenstein of J.P. Morgan Securities Inc. initiated coverage of Metris with a “market performer” rating.

With the possibility of a rougher economic climate looming, Metris is likely to be among “the first to feel the pain” in the credit card group, Mr. Freudenstein wrote. The company, a subprime lender with the second-highest loss rates at Sept. 30, will suffer from continuing portfolio seasoning and “probably unsustainably low levels of unemployment,” he wrote.

Still, Mr. Freudenstein said, he is impressed with Metris’ ability to produce less volatile income and expects that its earnings this year will have grown 49%, to $2.11 per share, and that they will reach $2.55 next year. “Our estimates assume healthy organic managed loan growth, modest net new account additions, a modest contraction in the net interest margin, strong fee-based revenue growth, and higher credit costs,” his report said.

Metris concentrates on “moderate-income households” with an average annual income of $35,000. It offers fee-based products, such as insurance and warranty enhancements, around the card service, according to Mr. Freudenstein’s report.

Meredith A. Whitney, an analyst at First Union Securities, said she expects the chargeoffs for the group to rise 15% next year and said that the rate for Metris should be higher than that. She gave Metris a “buy” rating but all its peers a “strong buy.”

Ms. Whitney said that Metris gets penalized for its comparatively lower earnings and its higher risk profile as a subprime lender.

Mr. Freudenstein agreed. He said the market also sometimes takes a different view of Metris because of its capital structure: The investment firm Thomas H. Lee Co. owns 31% of the company.

David Hines, president and director of research at the Avalon Research Group in Boca Raton, Fla., said that Metris is an “accident waiting to happen” and that he keeps rating the company a “sell.”

Mr. Hines guessed that all of Metris’ accrued income comes from late and overdue fees paid by low-income families who cannot get credit elsewhere. “This does not seem like a sustainable business model,” he said.

Metris was up 6.25 cents, or 0.26%, in Monday trading, closing at $24.5625 on a day that saw financial stocks enjoy a general upswing as they await the outcome of the Federal Open Market Committee meeting today.

The American Banker index of top 50 banks was up 4.45% and its index of 225 banks 6.08%; the Standard & Poor’s 500 index was up 0.81%. Only the Nasdaq composite index continued to slide, closing down 1.08%.

Charles Blood, director of financial markets strategy at Brown Brothers, Harriman & Co., wrote in his market outlook Monday that he believes “recent economic reports have been weak enough to encourage the Fed to actually reduce rates at its Dec. 19 meeting.” And The Wall Street Journal reported that some within the Fed are pressing for more than just a “neutral” outlook.

However, most economists expect the Fed only to set the stage for a rate cut early next year by shifting the wording of its scheduled statement to a neutral stance regarding inflation.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER