Bankrate Thrives Despite Mayhem in Mortgages

Based in North Palm Beach, Fla., Bankrate is a three-decades-old business that began as the publisher of a staid newsletter called Bank Rate Monitor. Today, Bankrate is a more than $870 million company that provides personal-finance information to millions of web-savvy consumers, and it's making the bulk of its money from one of the Street's favorite sectors: online advertising.

"People who aren't well-informed about Bankrate might think that if the mortgage industry is suffering, Bankrate must be suffering. But we're enjoying high advertising demand and consumer traffic," says Bruce Zanca, Bankrate's chief marketing officer.

Bankrate's flagship web site, Bankrate.com, lets people compare interest rates and fees on a range of financial products, from credit cards to car loans. People choose the product and Bankrate spits out a list of local lenders to choose from, showing each lender's fees and rates. If a consumer likes the terms, all it takes is a click of the mouse to be directed to the lender's web site. Each time a person clicks on a link, that lender pays Bankrate an advertising fee.

Bankrate, which has a business relationship with SmartMoney.com, has more than 800 such hyperlink advertisers. Just this summer, the company raised its hyperlink ad rates by between 15% and 25%. But the increases aren't tamping ad demand among banks, some of which are stepping up deposit activity in order to fund their suffering mortgage businesses. Countrywide Financial (CFC), for instance, recently announced it's doubling the number of branches that offer certificates of deposit and money-market accounts.

In this sense, Bankrate should prosper despite credit volatility. If interest rates are high, people shop around more to find the best deals on loans, or will want to maximize savings by finding the highest-yielding deposit accounts. If interest rates are low, people look to refinance and lock in better terms. Some analysts also expect Bankrate to benefit from the wave of adjustable-rate mortgages made in the early and mid-2000s that will soon reset, generating a large crop of refinancings.

"As the attractiveness of investments change, consumers also change their interests. Now that the housing market has cooled, consumers have changed their interest to CDs and deposits," says Denise Garcia, an analyst at A.G. Edwards in New York. "Bankrate is a media company. A lot of folks confuse Bankrate with being a mortgage company. But it's not a mortgage company, and you could even argue that as mortgage lenders get more desperate for qualified consumers, they may be willing to pay more" as advertisers.

In the second quarter, Bankrate's revenue increased 18% to $23.3 million, and earnings about doubled to $5.2 million. Online revenue accounted for about 87% of the company's total revenue, while print revenue from selling rate data to newspapers and other publications made up the rest. Page views were up 17% at 136 million. Although web traffic on Bankrate's mortgage pages fell as a percentage of total traffic, mortgage and refinance activity was still strong, and traffic on the company's deposit accounts pages grew stronger.

"Bankrate gets very high-quality consumers, and lenders are willing to lend them money," says Sameet Sinha, an analyst at Kaufman Brothers Equity Research in New York. "So Bankrate has emerged as a kind of 'best of breed' site."

Bankrate shares are up 25% year to date at $46.30 as of Monday's close. Compare the stock price to expected earnings, and Bankrate is trading at a steep 92% premium to the S&P 500. But factor in expectations for long-term earnings growth and the stock is trading at a 13% discount to the S&P 500, according to Thomson Financial.

Ultimately, Bankrate is banking on "a secular change in the market" in how people shop for financial products, says Zanca, the company's marketing chief. Whereas in the past people asked their realtor to recommend a mortgage broker, Bankrate believes they will now venture online.

There's reason for Bankrate to be optimistic. In the past two years, the percentage of Americans who research mortgages online increased 17%, according to a study by Forrester Research, a market research firm in Cambridge, Mass. Close to a third of these consumers want an online tool that will let them compare different lenders online, according to the study, "Online Mortgage Shoppers' Paths to Purchase."

Most popular are online mortgage calculators that determine monthly payments and affordability. In 2006, Bankrate acquired three web sites with such calculators: Mortgagecalc.com, Mortgage-calc.com and Mortgagemath.com.

Bankrate also has co-branded sites with companies including Yahoo (YHOO) and Move (MOVE), the owner of Move.com, and Realtor.com. Bankrate provides data and other content, and ad revenue is split down the middle.

As to future growth, Bankrate not long ago raised $92 million in a secondary stock offering, and the company is actively pursuing acquisitions. It's also expanding offerings in retirement, education financing and insurance.

"You have to ask yourself, is Bankrate an advertising play or a housing play? This is sort of the ongoing debate between the longs and shorts," says Colin Gillis, an analyst at Canaccord Adams in New York. "It would be foolish to say Bankrate's impervious to the housing markets. But despite the downturn, housing is not grinding to a halt."