This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Metris Fattens Up on Fee Growth

Updated from 11 a.m. EDT:

Did Metris (MXT), the credit card lender to tainted borrowers, speed up recognition of fee revenue in an effort to goose second-quarter earnings?

Wednesday, the Minnetonka, Minn.-based company reported second-quarter earnings of 63 cents a share, up 19% from last year and 3 cents more than analysts expected. The stock jumped $1.81, or 4.6%, to $38.81.

Earnings were aided by an unexpected jump in revenue from Mertis' fee businesses, known as enhancement services. Revenue from enhancement services totaled $82.9 million in the second quarter, 6% above the $78.3 million in the first quarter. Enhancement services are particularly important because they are so lucrative, carrying a pretax profit margin in the region of 70%.

On the Rise
Metris stock for 2001

So what happened in the second quarter that smells strange? Well, in the previous nine quarters, enhancement services revenue has equaled between 31% and 35% of the previous quarter's deferred income (a balance sheet item that represents money received but not booked as revenue in the income statement). In the last four quarters, the ratio has been steady at 31%-33%.

But in the second quarter, enhancement services revenue jumped to 39% of the previous quarter's deferred income. One explanation is that Metris, fearing that it would miss earnings forecasts, decided to recognize as sales a greater share of its deferred income than before.

What It Means

On the company's Wednesday conference call with analysts, a Metris executive commented on the relationship between enhancement services revenue and deferred income, in response to an analyst question on the subject. (Metris didn't return a call seeking comment.)

He said the deferred income from enhancement services was mostly derived from fees for warranties on consumer products, as well as fees for joining Metris' travel and auto clubs. It's probably the case that most of the enhancement services deferred income comes from warranty income.

According to the executive on the call, deferred income has been falling in 2001 as Metris sheds clients it gained as part of its onetime relationship with the catalog retailer Fingerhut. Most of the Fingerhut-derived contribution to deferred income would have been from warranty fees. Warranty revenue did drop in the second quarter, providing some measure of validation to Metris' explanation of why deferred income is dropping.

However, it's hard to believe that Metris suddenly shed a large amount of Fingerhut-derived relationships in the first and second quarters of this year. After all, the company has been talking about its desire to reduce dependence on Fingerhut relationships for over a year. In fact, since the end of 1999, it appears that Metris' enhancement services membership has almost completely turned over. At the end of 1999, it had 4.9 million members. In the following five-quarter period, ending in March 2001, a total of 4.6 million members lapsed, according to an analysis of Metris' numbers. Surely, a good chunk of the Fingerhut members were among that 4.6 million.

If Metris did bring forward revenue recognition, how much could it have added to earnings? Possibly around 6 cents. By going to 39% from 33% of deferred income, Metris booked an extra $12 million in revenue. Let's assume 70% of that, or $8.6 million, flowed through to pretax earnings. Adjust for taxes and Metris' net income was boosted by $5.3 million in the quarter, which is about 8% of net income.

Detox examined Metris last month.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to peavis@thestreet.com .

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
MXT $0.57 -20.95%
AAPL $125.42 0.72%
FB $85.76 -0.04%
GOOG $520.60 -0.18%
TSLA $268.26 2.38%

Markets

DOW 17,619.51 +23.16 0.13%
S&P 500 2,063.12 +5.48 0.27%
NASDAQ 4,986.8670 +28.3990 0.57%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs