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Tuesday, November 3, 1998

An Investment Opinion
by Dale Wettlaufer

Metris CFO Resigns

It can be either a non-event or a prelude to bad things. In the short-run, a top executive's departure can be a worrisome thing. Witness the freak-out over former Travelers Group President Jamie Dimon's departure from the presidency at Citigroup (NYSE: CCI). As a well-regarded executive and the longtime right-hand man of Sandy Weill, investors are definitely unsettled over his departure. Another financial services company, Metris Companies (Nasdaq: MTRS) got smacked around today after announcing last night that its Chief Financial Officer, Robert Oberrender, had resigned from the company.

When an executive has especially close ties to the Street, it throws things off when he or she clears out abruptly. And when there have been questions about accounting and the CFO hits the road, investors don't really get to sleep easily. Earlier this year, when former CUC Chief Financial Officer Cosmo Corigliani resigned from Cendant (NYSE: CD), the news turned out to be harbinger of bad things to come. In the case of Metris, the company has had a rough ride with the decline of financial services stocks since August and with a change in accounting principles announced on Monday, October 5.

Interestingly, both BT Alex. Brown and Piper Jaffray downgraded Metris because of accounting concerns on the Friday before that announcement, sending the stock down more than 30%. The accounting changes consisted of a change in the company's revenue recognition policy, which would push back recognition of revenues until a refund period had expired. Previously, the company had recognized revenues and amortized capitalized expenses during the refund period, rather than deferring revenues. The change is pretty much immaterial, however, as the company recorded a $3 million reduction in revenues and a $3.1 million decrease in expenses, for a $68,000 credit to net income for the quarter.

Another shoe that might drop is a change in the way the company capitalizes direct-response advertising, which would result in a $14.1 million charge to net income for charging off the deferred charges that are currently on the balance sheet. This would be a true one-time charge, though, and not a big-bath to make the books look better than they really should. And importantly, there hasn't been anything shady going on at the company -- it has changed its revenue policy and would change its expense policy to conform with changes in interpretations in accounting dictates made by the Securities and Exchange Commission. At least, it doesn't appear shady on the surface of things.

Financial services companies typically defer charges taken to acquire customers and recognize the expense over the course of the customer's account life. However, the more closely a specific expenditure can be tied to a specific customer account, the more comfortable people are with it. Since Metris' expenditures have to do with direct marketing, the responses for which are directly related to the revenues, this doesn't seem to be hugely problematic here. And for the intrepid value player that is willing to wade into uncertain waters, this is a company that generates a return on assets above 7% and a return on equity above 25% (annualized through 9 months of the year). At about 3.3 times book value if the deferred charges are written off and a return on equity of about 27.6%, a current earnings yield of 8.4% looks pretty interesting. You never know why some things look stupid cheap, though. More research into the company could be rewarding and would definitely need to be done for those unfamiliar with the company.