Tempered Enthusiasm For Bankrate; EBITDA Guidance Will Be Key

Sentiment has turned negative for Bankrate as a downgrade from Needham & Co. and cautious comments from JMP Securities, RBC Capital, and others have weighed in on the shares. Analysts were more positive on the shares just one month ago with most increasing their price targets on the stock. However, I've been sounding the cautious bell on this stock for several months on a few write-ups: Bankrate Shares Come Under Pressure; Bankrate Now Showing Google Ads To Prop Up Revenues; Great Refi Traffic But Where Are The Advertisers; Bankrate Has Run Out of Options To Support Its Stock.

I believe that Bankrate is a great trading stock and not one to hold for the long-term given the immense volatility in the shares - a takeout is one reason to hold. I was however hoping the shares would drop to the low-to-mid $20s prior to earnings so I could pick up a few shares, because I do like the company and believe in the management team. It's just that the macro environment for Bankrate is challenging and the shares haven't fully reflected those challenges, in my view.

The company reports earnings Thurs, February 5th, and the Street is expecting revenues of $42 million, EBITDA of $14.9 million (35.5% margin), and EPS of $0.34, all are reasonable numbers to beat. However, what will be key is the guidance for 2009 on revenues and EBITDA, but mostly for EBITDA. Consensus is at $190 million in revenues and $70 million in EBITDA in 2009. If management provides a number above $75 million for EBITDA in 2009, I think we may see a slight bump in the shares. Anything above $80 million and we will see a rally on short covering.

How the stock trades will come down to the EBITDA guidance provided by management so I am guessing Tom and crew have spent considerable amount of time on that one number or a range. Impacting that number is pressure on the display business due to continued weakening macro trends and essentially weak visibility, headwinds in the credit cards business, and whether the refi-boom continues. The deposit business is the one piece of the business that is operating without negative pressures.

On an EBITDA basis, the shares are trading at 8x '09 EBITDA, with EBITDA growing 20% in 2009 and at a 14% CAGR from '09-.'12, per my estimates. So the shares are inexpensive at these levels. On an adjusted PE basis, the shares are trading at a PE of 16x '09 but at a PEG of 1.2x based on a 13% EPS CAGR from '09-'12. So on a PE basis, the shares are reasonably priced. Whether to follow the EBITDA analysis or the PE analysis is up to the analyst or PM investing in the shares. But in my book (which is forthcoming), earnings is the chief driver of equity prices and I defer to the PE analysis to arrive at a valuation determination. Thus, based on a PE analysis, I believe that the shares are reasonably priced and I am awaiting a pullback in the low $20s before I buy the shares. Lets see what happens with the earnings report and conference call.