With two new acquisitions and surprisingly optimistic predictions, Bankrate tries to dispel worries about its connections to the tough mortgage market
Many investors have shunned Bankrate (RATE) lately for its close associations with the beleagured mortgage industry. On Dec. 10, Bankrate execs fought back. First, the company said its online business is on track for another year of rapid growth, despite big losses for its financial sector advertisers and a slowdown in the housing market. Second, Bankrate announced two acquisitions that will broaden its business further beyond mortgages, into credit cards and saving for college.
Bankrate stock, which has dropped 25% in the last month, recovered on the news, and ended with a jump of nearly 22% to $45.95 on Dec. 10.
Bankrate operates a web site, along with a shrinking print operation, that connects users and readers with financial products like mortgages, deposit accounts and auto loans. It earns most of its revenue from advertising by financial institutions pitching these products.
Citigroup (C) analyst Mark Mahaney says Bankrate's stock has been pummeled by worries about the mortgage environment and the big hits its advertsiers have taken from the credit crisis. A sell-off of $58.55 million in stock by Bankrate insiders also worried investors in early November, Mahaney wrote recently.
Bankrate president and chief executive Thomas R. Evans admitted that it's a tough environment for any company with "bank" in its name. "There's not a day that goes by when you don't see something scary in the newspaper about one of our advertisers," Evans told analysts Dec. 10. "But notwithstanding that, we're still feeling very good and very optimistic about our business. Indications so far are that 2008 is going to be another great year."
In fact, Evans said he expects Bankrate's online business to grow a minimum of 25% in 2008. The firm also issued earnings and sales guidance for 2008 that were higher than many analysts expected.
How can Bankrate be faring so well? With all the concerns about subprime loans to risky borrowers, the prime borrowers who use Bankrate's site are even more valuable, Evans says.
Citi's Mahaney talked to Bankrate advertisers who agree. "Advertisers generally regard [Bankrate] as one of the most effective advertising channels," he wrote. The company says its web traffic is still growing and it's still able to increase ad rates.
Also, Bankrate relies on mortgages for less than half its revenue. The two new acquisitions are designed to diversify Bankrate's revenue even further, so it is more insulated from the troubled housing sector.
Bankrate announced it will acquire Nationwide Card Services (NCS), an online marketer of credit cards, for $26.4 million in cash, plus an extra $7 million if certain performance goals are met.
It will spend another $2.25 million, plus $2 million if performance is met, for Savingforcollege.com. With just three employees, the site offers information on saving for college, including 529 college savings plans.
Bankrate's stock has been especially volatile over the last few months. Investors bail out at any sign Bankrate's fast growth is slowing, then jump back in when they get reassurance that its growth is on track.
Even optimistic executives admit that, while things look great now, that could change. "All bets are off," Evans said, if conditions get "dramatically worse" and the U.S. falls into recession.