Final Option for Bankrate: Find A Buyer

Bankrate (RATE) reported revenues and profits that missed street estimates and management declined to provide guidance for 2009. The lack of guidance was owing to low visibility, although management is expecting both revenue and EBITDA growth for the year. Revenues of $40.2 million and Adjusted EPS of $0.33, missed Street estimates of $42 million and $0.34, respectively. The shares fell 13% in after-hours trading.

Although I’ve recommended staying on the sidelines on the shares until more attractive entry points surfaced, I anticipated that RATE would have at least met estimates and provided guidance for the 2009. Thus, the results were indeed surprising. The miss was attributed to both weak display advertising and credit card revenues. The latter was due to loss of organic traffic for two thirds of the quarter due to lower positions on natural search results ($1mn impact), and credit card companies pulling back on offers and approving fewer people for cards (RATE gets paid on approved applications).

Management was surprisingly upbeat on the conference call, believing that they can increase EBITDA margins in 2009 and deliver EBITDA growth in the double digits as they: 1) increase margins for the credit card and insurance businesses; 2) lap expenses for the new website and China launch; and, 3) as they pull back on SEM expenditures. They cited current positive trends such as strong January traffic due to the current refi-boom and strong demand for the deposit channels. Clearly management has levers at its disposal to achieve its goals of margin expansion but macro trends are likely to trump management's ability to exercise those levers effectively.

So what now for the stock? Assuming that EBITDA and EPS Street estimates remains unchanged, we are looking at a stock trading at 7x '09 EBITDA and 14x '09 Adj. EPS. However, management's lack of definitive guidance calls into question the current growth rates of EBITDA and EPS and makes arriving at a true value determination difficult. In instances like this, I would defer to my DCF calculation, which shows the shares reaching a 12-month value in the range of $28-$33. However, I continue to remain on the sidelines and would prefer to buy the shares at a valuation closer to 5-6x '09 EBITDA and 10-11x '09 EPS, which would translate into a price of $20-$22.

Ultimately though, I think Tom Evans should actively shop Bankrate to other Internet companies like Yahoo! or IAC or a traditional media outfit like Newscorp. Unlike its Internet brethren eBay, Bankrate's business is not broken or structurally challenged. It, is however, highly levered to a financial environment that is unlikely to improve this year or next and the shares are likely to remain extremely volatile. For this reason, the best course of action is to be removed from full public disclosure so management can more effectively manage the business without the full pressure of meeting Wall Street estimates. That, in my view, is the best way to reward shareholders.