Last Monday, money-lending platform Tree.com (TREE 4.40%) reported record earnings and came in ahead of both analyst and management's own estimates. Nearly all metrics improved markedly, giving the company's rich valuation some justification. Tree.com is one of an increasing number of tech businesses that can appeal to conservative, risk-averse investors as the "tech" component comes in second to the underlying business -- in this case, financial advice and money lending. Tree.com is also a direct beneficiary of the ongoing recovery in the housing market, which is projected to continue its attractive growth rates through at least 2016. Here's what investors need to know about Tree.com
Recent results
Much of Tree.com's success is dictated from the returns it earns from its heavy marketing spend. The company is in a cutthroat business as a web-based provider of home loans and other financial products. Brand strength is incredibly important.
The fourth quarter is typically a difficult one for the company as it sees a seasonal drop in demand and a spike in advertising expense. While this past quarter was no different, it did perform better than expected, partially due to an increasing portfolio of non-mortgage-oriented products. The mortgage products performed much better than expected as well.
Revenue from mortgage products surged 49%, while non-mortgage products brought in 112% gains. Overall, the company saw a sales bump of roughly 50% to $36.4 million. Tree.com provides one very helpful metric in evaluating its marketing spend -- the variable marketing margin, which compares sales to the cost of promotion. This past quarter, Tree.com achieved a 32% improvement in the metric compared to the year-ago quarter.
Looking to the current quarter, management sees sales gains of 30%-40%, with 10%-15% growth for the full year. Full-year adjusted EBITDA is predicted to be in the range of $20 million to $21 million. The just-ended year posted $18.7 million.
Things to consider
One troubling trend is a drop in mortgage market originations throughout 2013 and the expected continuation of the trend in 2014. Mortgage originations do not include solely new mortgages, but refinancing as well. After a record high in 2012, both are dropping off substantially. The good news is that the trend is expected to stabilize after this year and hopefully achieve positive momentum in subsequent years.
While it would normally be of extreme concern to a business that sources home loans, Tree.com has been able to increase its sales tremendously during the period, suggesting market share gains and effective marketing practices. With conditions (hopefully) improving next year, investors may not have much to worry about in the long run.
And then there is the question of valuation. At 28 times forward expected earnings, Tree.com is by no means cheap. But this company is still very small -- under $400 million in market cap. It's potential to snag more of the home-loan business is huge, and its increasing focus on non-mortgage products gives it long-term stability that distance the business from the heart of the mortgage business.
Tree.com may not be on the menu for value-oriented investors, but those seeking growth (and not too keen on investing in red-hot IPOs or impossible-to-understand tech businesses) should certainly take a look. Things look good for the company in the coming years, as long as it maintains its healthy marketing return.
