Caveat Emptor Bankrate Shareholders

I feel like I've entered the funny house of mirrors because personal finance content distributor Bankrate's (NYSE: RATE  ) fourth-quarter earnings are definitely not what they appear -- at least if you dig a little deeper.

If you just looked at the top-line figures and left it right there, you'd walk away thinking that Bankrate reported another solid quarter. Revenue for the year jumped 92%, adjusted EBITDA rose 90%, and the company reported fourth-quarter profits of $0.19 -- sailing past Wall Street's expectations by $0.04. Now let's dig a little deeper, and I'll show you why you shouldn't always focus on the top-line numbers.

First, Bankrate has been growing through acquisitions. If you back out its most recent purchases, NetQuote and CreditCards.com, the financial content company still grew, but only by 41% organically -- not the original 92% that's implied over the year-ago period. Bankrate was correct to highlight the latter figure.

It wasn't just the company's full-year results that piqued my curiosity either. In the fourth quarter, Bankrate noted that revenue jumped by 47% over the year-ago period. Yet, expenses jumped by 77% year over year with marketing expenses leading the way, up 166%! Display advertising grew by only 6% in the fourth quarter; but it should be noted that this area now makes up less than 10% of revenue with the company transitioning its focus to lead generation products, which, along with cost-per-click, grew substantially. Still, expense growth easily outstripped revenue growth.

The nail in the coffin came from the company's very vague guidance. Bankrate anticipates that its EBITDA margins will fall in lower 30% range in fiscal 2012, with sales growth in the mid-20% range. Sounds decent, right? Not so fast...

If you compare the company's guidance for mid-20% sales growth with the current Wall Street expectation of 31% sales growth in fiscal 2012, there is what I would refer to as a "gap." Not only that, but I would go so far as to say its lower EBITDA would more than likely put 2012's EPS estimates below Wall Street's estimates as well. So much for that fourth-quarter earnings beat, since Wall Street is always looking forward.

If you compare Bankrate's metrics to some of its closest peers you'd also notice a stark reality -- Bankrate just isn't that exciting. Thomson Reuters (NYSE: TRI  ) seems cheap at just 12 times forward earnings and a mere 14 times cash flow -- plus its dividend pays north of 4%. Even Morningstar (Nasdaq: MORN  ) is valued at 24 times forward earnings and 24 times cash flow and pays out a marginal 0.7% dividend. Where's Bankrate? It's valued at 30 times forward earnings and an enormous free cash flow multiple ... and not paying out a penny to shareholders.

With Bankrate's peers operating more efficiently, and Bankrate's growth rate clearly slowing, allow me to parody one of the greatest cliches of all time: "Move along ... there's nothing to see here." I plan to make a CAPScall of underperform on Bankrate, and I suggest shareholders seriously dig into these results before they make the choice to hold their shares.

What's your opinion on Bankrate? Share it in the comments section below, and consider adding Bankrate to your free and personalized watchlist. 

Also, to avoid worrying about stocks like Bankrate, consider downloading a copy of our latest special report, "The Stocks Only the Smartest Investors Are Buying." Learn why our analysts and some of the best money managers are choosing a select few companies to buy right now. Best of all, this report can be yours for the low, low, price of free! Don't miss out!

Editor's note: A previous version of this article mistakenly stated that Bankrate's December secondary offering will be dilutive to current shareholders. The Fool regrets the error.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Morningstar. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 10, 2012, at 4:12 PM, brucezanca wrote:

    Mr. Williams,

    I was disappointed to read your recent story, "Caveat Emptor Bankrate Shareholders." The story included several factual inaccuracies -- hopefully you will correct them for your readers' benefit. For example:

    - Bankrate's secondary offering didn't dilute investors by a single share.

    - You wrote that "even traditionally strong areas for the business were weak" and highlighted the 6% growth in display advertising. While you're certainly entitled to your own opinion, it seems unfair to focus on display advertising, since that area now represents less than 10% of Bankrate's revenue. As our CFO pointed out during the earnings call, we have monetized more of our impressions with cost-per-click advertising, lead generation and other products, which reduced our display growth rate but positively impacted the business. For the year, revenue from our lead generation products increased 125% to $329.5 million. And our CPC revenue was up 47% in 2011.

    - In our press release (attached) and our earnings call, we went to great lengths to focus on the organic, pro forma growth that annualized the impact of the NetQuote and CreditCards.com acquisitions. We don't believe that we hid these numbers in the fine print. We are obviously required by the SEC to report the actual (non-pro forma) numbers, but by focusing on the pro forma numbers, we gave investors and analysts a fair look at Bankrate's organic growth.

    The next time you find yourself in New York, I'd like to invite you in for a discussion with management so that we can help you more fully understand our business model and growth trajectory. Or if you'd rather set up a conference call, we could do that, too.

    In the meantime, it is hoped you will revise your story with these factual corrections. Whether you like the company versus the peer group, or have an issue with the guidance versus the street's expectations is an opinion to which you are entitled. However, you are not entitled to your own set of facts. I look forward to your response.

    Thank you,

    Bruce Zanca

    SVP, Chief Marketing/Communications Officer Bankrate, Inc.

  • Report this Comment On February 13, 2012, at 10:43 AM, zippie26 wrote:

    "Whether you like the company versus the peer group, or have an issue with the guidance versus the street's expectations is an opinion to which you are entitled. However, you are not entitled to your own set of facts."

    Oh SNAP! You just got TOLD!

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