Metris Price Dives, But Analyst Sees Turnaround

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Metris Companies Inc. had no shortage of bad news last month.

The financial products and services provider's stock price dipped from $2.68 on Jan. 15 to $1.90 at the close of market the next day.

Then came the news Jan. 22 that about 180 employees were being eliminated. More than half were at the Minnetonka, MN, headquarters, and this included about 25 percent of senior management. The move was expected to bring an annual savings of $20.8 million, and the company will take a first-quarter 2003 charge of $4.9 million involving the reductions. Metris' headcount fell to about 3,700.

Finally, the stock reached a new 52-week low of $1.25 on Jan. 27, nearly half its $2.47 level Dec. 31.

"I think the biggest underlying issue has been the credit quality deterioration within their credit card portfolio," said Jennifer Scutti, executive director at CIBC World Markets, New York. "As a consequence ... cash flow back to the company has been impaired because the cash that would normally flow back to the company is being held at the master trust to ensure that the company's outstanding asset-backed securities or bonds remain whole."

On Jan. 29, the company reported a fourth-quarter net loss of $48.5 million and a net loss of $33.9 million for 2002. The results included about $18 million in pre-tax, one-time items in the fourth quarter for the write-down of excess property, equipment and operating leases, and another $7 million of one-time marketing expenses.

Yet Scutti said the company is turning things around.

"They are slowing the growth rate of their business, have tightened up their underwriting standards and are trying to reduce their risk regarding the type of customers that hold a Metris credit card," she said. "They are making progress, but it will take some time. I suspect they will report at least another two or three quarters of losses, and they probably won't return to profitability until the fourth quarter, assuming the same type of economy we have now."

Scutti described its cardholders as mainly subprime customers -- middle- and lower-middle-income consumers "who generally live paycheck to paycheck" and are those most affected by the rising unemployment rate.

"The company has also focused on improving its risk-based pricing," she said. "Just because they are higher risk doesn't mean they are not profitable. Profitability depends on pricing their cards to the risk taken. They are trying to not only tighten up on underwriting standards, but also price their accounts to the appropriate risk with the interest rates charged."

In other news, ClickAction was acquired by infoUSA, which is in the portfolio. ClickAction was replaced with E.piphany Inc.


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