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.
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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.
