BankRate, (the #1 online site for mortgages, insurance, credit cards and deposits), is back.  After having gone private in August 2009, the company is now set to emerge publically with a stronger set of assets, a more robust income statement and better prospects.  The company has its set of Pros and Cons (described below), but overall, the IPO seems attractive, with the stock likely worth twice as much within 3 years.  I plan on going long RATE, and here’s why…

First, The Risks in the BankRate Story
There are always many risks with any new equity, but I don’t see anything too glaring with BankRate.  This list is not supposed to be exhaustive, but more emblematic of the top issues in my mind:

Risk #1.  Economy.  By far the #1 risk (as we learned in late 2008 /early 2009) is the general economy.  If consumers are shying away from various financial products (mortgages, credit cards, etc), then advertisers will scale back.  Further, as we saw back then, even if some consumers wanted products, sometimes the banks had limited balance sheets, and only the absolute best consumers could get offers.  I can’t predict where the financial markets are going, but this is a risk to keep in mind.

Risk #2. Poor Quality Competition.
   As we recently saw with QuinStreet, increased competition from lower quality lead aggregation sites, can take share cheaply.  However, they typically provide lower quality leads, which usually takes the advertisers a little time to process that “they get what they pay for” (ie low conversion of consumers and hence lower ROIs).   BankRate, being the top site, provides quality leads for its advertising customers – the fact that RATE CEO has talked about 10-20% increase in pricing and have gotten no pushback, that’s a good sign as to the quality of leads BankRate is providing.

Risk #3.  Search Engine Changes.  As we saw with some other Internet companies during the infamous Panda changes from Google, search engine results can have a large impact on a website’s traffic.  BankRate gets 80-90% of its traffic for free (ie not having to pay for links), and about 50% of that comes from search engine optimization.  Should Google somehow change its algorithym or other competition improves its rankings compared to BankRate, then that could prove negative to RATE.

Second, The Pros in the BankRate Story
Pro #1 – Top Site, Large Markets  & Top Management.  BankRate’s collection of sites make it #1 in insurance, credit cards, mortgages, and deposits.  It is the clear leader, paring up top advertisers with good leads.  The value of its leads is demonstrated in its scheduled 10-20% price increase the company is passing through next month, with no push back from advertising clients.  Moreover, this leading position is well situated to penetrate the several large target markets (Insurance is a ~$1Trillion market, as is credit cards; home loan market is a $14 trillion  market and the deposit market is over $9 trn).  Further, this leading group of sites is run by a strong and seasoned team.  CEO Tom Evans is highly respected and has been leading the company since 2004.  CFO Ed DiMaria has been the CFO for 5 years; and Mikey Ricciardelli is an online marketing veteran having joined the company over 5 years ago.

Pro #2 – Revenue  Mix.   The type of ad revenues on BankRate are much different than on other sites that are supported by advertising.  Most other sites are paid by CPMs (showing banner ads).  For BankRate, less than 10% of its ad revenues are generated this way, and that is shrinking each year.  BankRate’s ad revenues are more performance based (cost per lead (~50%+), cost per click (~15%), and cost per approved transaction (i.e. credit cards ~25%).  Because these revenues are more performance based, they should be more protected in a downturn.

Pro #3 – Margin Growth & Improving Financials.  There is a lot of leverage to the BankRate model, and with growing revenues, the EBITDA margin line should expand from ~30% intot he higher mid 30%s.  The exact level will be predicated on the amount of investment the company does for new products and incremental growth.  This margin expansion should allow for faster bottom line growth, building cash (the company should have ~$50m post IPO), and further strengthening the balance sheet (~$200m of debt post deal), or allowing for accretive acquisitions.

Lastly, Let’s Take a Closer Look at Valuation
Taking the mid point of the offering range ($14-16 per share), BankRate (RATE) appears to have an Enterprise Value of ~$1.65b and could be viewed a little rich at 14x this year’s EBITDA and 31x this year’s earnings.  However, the company is growing strongly organically (i.e. adjusting for the acquisitions historically).  While this year ~$390m of revenues should grow almost 30%, they are estimated to grow well above 20% as well and likely hover in that range for the near term.  This strong growth is due to the double-digit growth of online advertising that is expected, BankRate’s leading status, and the rolling out of new products in the near future.    So to get a better gauge of BankRate’s valuation, it’s best to look at some of the forward multiples over the next few years.  Looking at next year, we can see the offering price values the company at ~11x EBITDA and a PE of 21x.  This is reasonable given the 20% growth the company should achieve on the bottom line.

In fact, if we applied a 24x forward multiple on the earnings and free cash flow, and a 13x forward multiple on EBITDA, I can see the stock being worth more ~$23 by the end of next year.  That would represent ~50% upside in 18 months.  Below I look at the three important valuation criteria (EPS, FCF, EBITDA), while adjusting the assumed multiples for each metric to give a range (I highlight the center column as my base case, but one can see where the equity value can go based on different multiples).

Moreover, if I decreased my multiple a point as I roll my target out and see what the stock could be worth in 30 months (i.e. my PE multiple is now 23 instead of 24, and my EBITDA multiple is 12x instead of 13x),  I can see how the stock can go to ~$27 by that time.   This would represent a compounded return of  25% over that time frame – very robust for any investor.

Lastly, in investing in IPOs, I like to see a path to where I can double my money in three years.  If I look to where the stock can be at the end of 2014, I can see it worth more than $30, a double for my money and a Compounded Annual Growth Rate (CAGR) of >20%.  That’s a great return for any fund.  Hence, I like this investment for me.

Summing it all up, while any company tied to the financial markets will have economic risk, I think the collection of leading assets, market opportunity, top leadership, strong financials, and a attractive valuation make BankRate’s reintroduction to the public markets a successful one.

Posted by Robert Peck CFA at 6/14/2011 2:27 PM
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