Great Refi Traffic But Where Are The Mortgage Advertisers

Follow up to my post “Bankrate Has Run Out of Options To Support Its Stock”. Since my posting the shares of Bankrate have rallied 15% vs. an 8% uptick in the Nasdaq, as the company benefits from refinance traffic to the site, which means more page views, which mean more revenues. This is the result of the government's effort to drive down interest rates, which led to a surge in mortgage applications, most of which were refinance applications.

However, a check on the site shows that there are not many mortgage advertisers advertising against that traffic.

On the home page are graphic ads from automobile companies and credit card companies. On the mortgage channel are low quality advertisers like Mortgage Capital Associates and AmeriSave. I see credit card ads on the mortgage page and on the other non credit card channels, and if I were the advertiser, I would not want to pay for mortgage traffic. Seems that American Express and Discover are paying the graphic bills this quarter.

Moving on to the rate tables. The story is the same for several cities I surveyed - there are only a few “paying” advertisers from lenders that I have never heard of like Total Group and Direct Mortgages. [Paying advertisers are hyperlinked.] Los Angeles did have a full slate of advertisers on the site, so that’s one positive. However, there is a caveat above that the lenders are only accepting applications from consumers with credit scores of 700 and above. In this environment - keep dreaming.

Also, what’s with all the pop-ups? Are those being counted as page views?

As a side, I noticed that the acquisitions are no longer ranked high in the organic search results of Google and Yahoo. That is likely to be a problem, which would cause management to ratchet up their paid search spending and pressure margins.

Valuation. The shares trade at 10x '09 EBITDA with 09 EBITDA growing 20% but over five years EBITDA is growing at a 13-15% CAGR. Either way, you can argue that based on an EBITDA basis, the shares are reasonably priced. On an Adjusted EPS, the shares trade at 20x '09 EPS, with '09 EPS growing about 20%, so the shares seem reasonably priced now on an EPS basis. I rather look at the valuation for these stocks on growth adjusted earnings, and on that, the stock trades at a PEG of 1.3x (15% long-term growth rate), which again is not all that egregious, but suggests little room for upside.

This week, mortgage applications have tapered off. It could rebound if interest rates drop to the government's target 4.5%, but the problem for RATE is that they will get a boost initially but it won't likely be sustainable. Hence my concern on this stock even though it is reasonably priced. There is a big chance that management may not be able to deliver on EBITDA and earnings expectations next year due to the economic situation, meaning that the shares today may actually be expensive. My other concern is that credit cards, insurance, and college savings financing options are likely to come under pressure next year posing a problem for RATE's other channels and properties, increasing the chances for earnings misses in '09. And as I noted in the previous post, management will likely not be able to support the stock with share repurchases and more acquisitions.

Full Disclosure: I am neither long nor short Bankrate Shares.