Invest in the Internet & U.S. Consumer
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The American consumer is slowly rebounding from the great recession. Healthier balance sheets will drive demand for financial products as people start to spend more. With the growth of smart phones the internet continues to grow as one of the main mediums which people use to find the latest financial information. Bankrate is a great example of a company which offers comparison services of a number of different consumer financial products. Bankrate and Lending Tree are trading at high valuations, but Google offers exposure to the same market but at a more reasonable price. There are many ways to play the rebound in the U.S. consumer and Google is one of the best options.
Household debt payments as a percentage of disposable income is one of the most important metrics as it shows when consumers are able to open up their wallets. Bankrate (NYSE: RATE) is in a great position to grow along with a stronger consumer. The company owns a number of personal finance websites and offers a number of different lead generation services to financial companies. Healthier balance sheets in the private sector will make mortgage approval easier and help Bankrate cross sell its other product recommendations like credit cards, insurance, and car loans. RATE is very oriented toward the U.S. and the internet. In 3Q 2012 95% of all revenue came from the U.S. and 98% of revenue originated from their online operations.
Unlike some its competitors, Bankrate does have some debt with a total debt to equity ratio of .23. The downside is that the company trades at a PE ratio of 28.3 which is very expensive. The Bankrate brand is well developed and the company has decades of operating experience but the online world is very competitive and RATE is forced to compete with much larger firms like Google. If valuations come down RATE is worth a second look, but at current prices the company is just too expensive.
Tree.com (NASDAQ: TREE) operates a number of consumer financial and related websites under brands like Lending Tree, service tree, and degree tree. Similar to RATE, TREE sells leads to insurance companies and banking institutions. Its balance sheet is clean with no debt and Tree.com's ROA of 19.2% is far superior to RATE's ROA of 3.6%. With that being said TREE posted EPS losses from 2008 to 2011 and in 2012, Q3 was the only quarter to report positive normalized income. In past 12 months TREE's revenue was tiny a $64.2 million. Expected 2013 EPS around is $.63 and the current stock price of $17.47 the company trades at forward PE ratio of 27.7. The industry as a whole is set to grow, but TREE looks rather expensive given its high PE ratio and small size in the huge consumer finance industry.
Google (NASDAQ: GOOG) is one of the titans of the internet. Their products are so integrated into the web ecosystem that their size and ad network gives advertisers unparalleled reach. Adwords and Google's re-targeting program allow advertisers to build their own combination of cost per action campaigns alongside traditional campaigns which are charged per page view or click. RATE and TREE face challenging competition from Google because of Google's size and duopoly in the search market where many consumers start their online discovery process. Even though GOOG's EPS is expected to grow 17.5% in 2013 they currently trade at a PE ratio of 22.4. Their balance sheet is clean with a low total debt to equity ratio of .09 and their ROA is a respectable 11.8%. GOOG is not prohibitively expensive and the improving health of the U.S. consumer should increase competition amongst advertisers, boosting Google's bottom line.
The great recession was a horrible experience where millions of people lost their jobs and many were forced to live on food stamps. Housing is slowly starting to come back and unemployment is slowly ticking downward. The private sector has been able to help improve its balance sheet and now consumers are ready to get new loans for cars and houses. The internet is one of main mediums where consumers go to find financial information and Google is in a great position to take advantage of improved consumer health. Currently Google trades at a reasonable PE ratio of 22.4 which makes them a good investment given their power as a monopolizer.
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