Mark Mahaney on Bankrate: Hold Out for a Cheaper RATE (RATE)

| About: Bankrate Inc. (RATE)

Mark Mahaney Smith Barney CitigroupCitigroup analyst Mark Mahaney initiated coverage of Bankrate Inc. (NYSE:RATE) with a Hold, High risk rating and $50 price target. From Mahaney's report:

  • Initiating coverage of RATE with a 2H (Hold, High Risk) rating & a $50 PT. With the stock up 60% YTD & trading at over 50X '06 non-GAAP EPS, we view valuation as relatively full and see investment pos's balanced against risks.
  • Key positives include: 1) Exposure to 'Net advertising secular growth; 2) Leading position among consumer finance Websites; and 3) Significant new growth opportunities ahead -- new verticals, tiered-pricing, traffic growth optimization, lead generation. Key risks include: 1) Significant competition from broad online consumer platforms & vertical offerings; 2) Revenue exposure to the challenging mortgage sector; & 3) M&A integration risks.
  • Our estimates -- $81MM in revenue and $28MM in EBITDA in '06 -- which we view as appropriately conservative, are in-line with company guidance.
  • What would make us Bullish? Material traction against the new growth opportunities. Bearish? Loss of consumers or advertisers to competitors.
  • Background:
    Bankrate is a leading provider of consumer finance information via its core Website, as well as via the co-brandedWebsites of its partners. It also provides rate tables (mortgage, home equity, auto, CDs, credit cards, etc...) and other consumer finance content to print publishers and newspapers. Bankrate has relationships with over 5,000 financial institutions and banks covering 300 different financial products. Broadly, Bankrate has two business segments – 1) online publishing (88% of 2005 revenue) and 2) print publishing (12%). Bankrate’s online publishing revenue consists of two formats -- display advertising (e.g. banner ads) and hyperlink advertising (e.g. pay-per-click links in its rate tables). Bankrate generates revenue in its print publishing segment by selling mortgage rate and product listings in hundreds of newspapers and magazines. Bankrate enters into agreements with print publications for blocks of print space that are sold to local mortgage lenders. Bankrate shares the revenue with the newspapers on a percentage basis.

    For consumers, Bankrate provides finance related content, including rate tables, across nine different content channels -- Mortgage, Home Equity, Auto, CDs & Investments, Credit Cards, Checking & Savings, College Finance, and Insurance. For example, a consumer shopping for a mortgage can go to Bankrate’s Mortgage channel and compare rates from a large selection of lenders, sorting by city & state, loan amount, mortgage type (fixed, ARM, interest only), points, fees, etc...

    For marketers, Bankrate provides a highly targeted consumer base. Advertisers can, for example, buy display advertising on or buy Hyperlink ads and pay on a cost per click basis. Below we present some of Bankrate’s leading advertisers.

    Select Leading Advertisers on Bankrate:

    In 2005, Bankrate generated total revenue of $49MM, up 25% from 2004, EBITDA of $15MM (up 57% Y/Y), and GAAP EPS of $0.57.

    Recent Developments

    Stock activity -- Bankrate’s stock is up approximately 60% year to date after climbing 113% in 2005. A series of successfully executed strategic initiatives (described later in this report) under a new management team that joined in mid-2004 with CEO Tom Evans were behind these share gains.

    RATE Stock Price Since 2004[click on chart to enlarge]

    Recent acquisitions – In late November 2005, Bankrate announced its intention to acquire FastFind and MMIS/ think the FastFind acquisition provided Bankrate with a new online lead generation platform, and we view the MMIS/ acquisition as further building out Bankrate’s advertising inventory and distribution platform. The combined purchase price was approximately $40MM in cash. In two sentences...FastFind matches up the results of online questionnaires filled out by consumers with lenders who pay for the lead and then call the consumer with their offering. And MMIS/ publishes mortgage guides in over 300 newspapers while operating aWebsite that provides financial rates and information connecting consumers with lenders.

    March 2006 quarterly results – Bankrate announced its March 2006 quarterly earnings on April 25th. March quarter revenue of $19.6MM, EBITDA of $6.6MM and non-GAAP EPS (excluding stock-based compensation) of $0.22 came in higher than Street expectations of $18.4MM, $5.2MM and $0.19 respectively. Bankrate delivered Y/Y organic growth close to 50% for the quarter, an acceleration from prior quarters’ levels. And the EBITDA margin was up 570 bps Y/Y to 33.5%. The company also increased its 2006 revenue guidance range from $79-$81 to $80-82 and provided an EBITDA guidance range of $28-$29MM.

    Secondary offering – On May 5th, Bankrate announced the offering of 2.3MM shares of its common stock at $48.25. 2MM of the shares were offered by the company, with 346K shares offered by existing shareholders. The company announced that it intended to use the net proceeds for general corporate purposes, including future acquisitions.

    Investment Thesis
    We are initiating coverage on RATE with a HOLD rating and a $50 price target. We highlight several key positives and risks. Key investment positives include:

    1. Exposure to the secular growth in online advertising – We estimate a 24% CAGR for U.S. online advertising from 2005 to 2008.

    2. Financial services is one of the largest online advertising categories – Per the Interactive Advertising Bureau, the Financial Services category accounted for 12% (or $1.5B) of total U.S. online advertising in 2005.

    3. Bankrate is one of the leading consumer financeWebsites with a relatively unique competitive positioning – Bankrate is the 6th most popular finance relatedWeb property, enjoys a relatively unique competitive positioning, and draws high customer satisfaction results from its largest advertisers, based on our proprietary survey.

    4. Potentially material new growth opportunities ahead – We have identified several new potential growth drivers for Bankrate – 1) Continued revenue yield management improvements via initiatives like tiered pricing; 2) Further development of new verticals, such as Insurance and Real Estate; 3) Traffic growth optimization through paid and organic search efforts; and 4) The relaunch of a lead generation service via the FastFind property.

    5. Reasonably high entry barriers given the depth and breadth of Bankrate’s network – Bankrate now has 170,000 different rate tables covering over 300 financial products, drawing on over two decades of relationships with 5,000 financial institutions.

    6. Strong strong current fundamentals – In terms of organic revenue growth (up 48% Y/Y in March), margin expansion (EBITDA margin up 570 bps Y/Y to 33.5% in March), and in terms of direct page views (up 44% Y/Y in the March quarter to 101MM).

    With Rate, we also see several key investment risks:
    1. Competition from broad Internet content aggregation sites as well as from vertical specific finance news and research companies –While Google, Yahoo!, MSN, and AOL are indirect competitors, Dow Jones and Forbes are among the direct competitors.

    2. High exposure to the challenging mortgage sector –We estimate that mortgage-related advertising accounted for approximately half of Bankrate’s total revenue in 2005, and Citigroup’s mortgage sector outlook is cautious.

    3. Low growth and low margins in Bankrate’s print publishing business – We are modeling mid-single digit growth and mid-teens gross margins for this segment, approximately 20% of RATE’s 2006 revenue.

    4. Exposure to click fraud - Online advertising with a pricing model based on Pay Per Click (NYSE:PPC) or Cost Per Click (NYSE:CPC) revenue inherently suffers from potential click fraud.

    5. M&A integration risk – Based on the recent acquisitions of FastFind and MMIS/ and the distinct possibility that the proceeds from the secondary will be used for more deals.

    Our Price Target – We arrive at our $50 target price for RATE based on a combination of EV/EBITDA and P/E analysis. Our P/E analysis generates a price target of $49, while our EV/EBITDA analysis generates a price target of $51. Our $50 price target is the average of the two. We apply a 43X multiple to our C2007 proforma EPS estimate of $1.14 to reach a $49 target price. (Our proforma EPS estimate adds back non-cash stock compensation charges and non-cash amortization, adjusted for taxes, which is consistent with our methodology for other Internet stocks.) For EV/EBITDA, we apply a 25X multiple to our 2007 EBITDA estimate of $37MM ($1.78 per share) to reach a $51 target price, adjusting for $117MM ($6.35 per share) in year-end 2006 net cash.

    We view RATE’s valuation as relatively full. As detailed below, RATE currently trades at a 27.5X EV/EBITDA multiple on our estimates vs. its comp set at 25.1X, a premium that we would view as modest. And on a P/E basis, we have RATE trading at 47.6X our 2006 proforma estimates (which adjust for stock-based compensation and non-cash amortization) vs. its comp set at 51.6X, a discount that we also view as modest.

    Comps Valuation for RATE [click on image to enlarge]

    Our stock call –We are initiating coverage with a Hold rating and a $50 PT. What would make us Bullish? Material traction against the new growth opportunities detailed in this report. To quantify this somewhat, based on our valuation framework and our risk-required 20% return for a Buy rating, we would need to see this traction develop into approximately 10% upside to our 2007 proforma EPS estimate of $1.14, on today’s price levels. We don’t believe we will be able to see potential signs of this traction until Q3:06 at the earliest. What would make us Bearish? Loss of Bankrate consumers or advertisers to competitors.