Bankrate Has Run Out of Options To Support Its Stock

…And Is Likely To Suspend Acquisitions and Share Repurchases

Bankrate’s shares have benefited from two recent stock upgrades to Buy by Citigroup and JMP Securities with both of their thesis resting on an imminent refinancing boom. The refi story is an old catalyst hat for Bankrate, which in my view, hasn’t really supported the stock. This stock is by far one of the most volatile of the Tech/Media stocks that I follow.

The company does have a strong management team that has successfully weathered the storm over the past year and kept the stock price from collapsing like the share prices of other finance related stocks. However, management has done so through acquisitions and to a lesser extent stock repurchases. However, we offer a view that both acquisitions and stock repurchases will likely end in the near-term and the stock will have little legs to stand on. Read on for my view on this…

In an effort to diversify its business model away from mortgage advertising and allay investor concerns that the model was too reliant on mortgage ads, which was under pressure from a deteriorating housing and mortgage market, Bankrate embarked on an acquisition spree, acquiring six companies over the past year. The acquisitions range from credit card services, insurance, and college savings sites. Management has paid $143 million for those six acquisitions.



Right before the first acquisition (3Q07) Bankrate had $146 million in cash on the balance sheet and was on track to generate $40 million in free cash flow in calendar year 2008, by most Street projections.

What has been ignored by investors is that Bankrate has agreed to pay the owners of those acquisitions an additional $42 million in performance based earn-outs. This is a typical part of most online media acquisitions (think eBay and Skype). That brings the total purchase price up to a hypothetical, and could be a very real, $185 million for a company with a market capitalization of $600 million. Thus, Bankrate has paid about 30% of its market capitalization in acquisitions. Note that the shares have fallen ~45% since the first acquisition (to be fair, part of the decline is market related).



In the midst of those acquisitions, Bankrate instituted a $50 million stock repurchase program, of which $45.6 million is remaining.

At the end of 3Q08, Bankrate had $41 million in cash on the balance sheet. Street estimates have the company growing its cash balance to about $120 million at the end of 2010, so that’s an additional $80 million in cash generated. Over that time Bankrate will have had to pay $42 million in earn-outs. So do that math – Bankrate owes $42 million in earn-outs but will only have $120 million in the bank over that time period that it owes due the earn-outs. [Now that’s assuming that the acquisitions perform and Bankrate owes the money.]

So with the share repurchase program and the earn-outs, Bankrate could have to shell out all of the cash generated through 2010 ($45.6+$42), ending with only $30 million in the bank.

My guess is that management has seen this in their internal models and have decided to suspend acquisitions and share repurchases in the near-term to conserve cash in light of what could be a very challenging 2009. This is wise given that they have 6 concurrent integrations, a website redesign, a China launch, and a challenging display and print business to manage. Given that, in my view, the announced acquisitions and the share repurchases have supported the stock over the past 12 months, the shares will have little support in the near-term and will likely drift back down toward the low $20 range.

Now the stock is cheap according to Citigroup analyst Mark Mahaney, trading at 6.8x ‘08 EBITDA and attractive given that ‘09 EBITDA is projected to grow 26%. However, the imminent refi-boom, if it does materialize, or the website redesign won’t be enough to convince investors to pile into the stock. At most you will see some short covering, which Mark Mahaney said is 32% of the float. Investors will have to hope that management is successful in driving those multiple acquisitions to scale over the next year, margins do improve, and they get to the 26% EBITDA growth rate, while being hopeful of zero hiccups along the way. That’s a tall order that is keeping me on the sidelines for now.

Disclosure: I do not have a position in Bankrate, long or short.