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Financial shopping site a good buy (for now)

A well-performing initial public offering. A price-to-earnings ratio in the 40s. A long-term competitive position that's in question.

Here at VOX, that is usually a recipe for caution. Quite a few "don't buy" columns have been built around such a collection of facts.

As it happens, all of these statements apply to Bankrate Inc. And despite that, the company's shares seem intriguing as a near-term proposition.

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The Bankrate name will likely be unfamiliar to Canadians. Even in the United States, where the firm operates, many Americans may think of it only as the supplier of the periodic reports in the local newspaper about which banks are offering the best rates on certificates of deposit.

What Bankrate has become over the past couple of years, however, is the primary destination for U.S. consumers who shop online for all manner of financial products.

The company is more than three decades old, starting as a provider of financial data to newspapers and other print publications. It started moving online as early as 1996, however, and spent 10 years as a public company, until an investment firm took it private in 2009.

Some companies spend their brief time as a private company slashing costs and prettying up their income statement to get sold back to the public. But in the two years before its 2011 IPO, Bankrate invested in its platform and acquired other financial comparison-shopping sites such as and insurance sites and

The result? Today, is the leading destination for U.S. consumers who are researching a wide range of financial products online. It gathers pricing data from at least 4,800 institutions in 600 local markets. Analysts at Goldman Sachs performed a wide range of Google searches on financial products and found showed up in the top three results – and often No. 1 – for queries like "mortgages," "credit cards," and "insurance quotes."

All told, Goldman Sachs estimates, generates 75 per cent of its traffic either through "organic" (free) web searches or through customers typing the site's name directly into the browser. Another 10 per cent comes directly from partners, meaning Bankrate has to pay, though advertising, for just 15 per cent of its traffic.

This, says the Goldman Sachs team, represents a significant advantage for Bankrate, as newer and younger competitors won't have the company's history, and are more likely to have to pay several dollars per customer in acquisition costs.

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The company makes money both from advertising and lead generation – i.e. sending its users to a financial provider who then closes the deal. The use of the Internet to research financial products is growing – the Goldman Sachs analysts, citing outside research, say 60 per cent of consumers research financial decisions online, with 37 per cent applying for a product online. But, they note, there's a "considerable gap" with just 23 per cent of financial services ad dollars spent online, and the rest going to the traditional venues like print and television. "We estimate that just closing the smaller of those two gaps conservatively represents a $1.7-billion opportunity," says Goldman Sachs' Heath Terry.

Of course, Google isn't going to stand by and watch Bankrate suck up all those clicks. The search giant introduced its "Advisor" financial service in May of last year. However, Google's product is not fully formed, as it has no insurance offering. Other parts of its service are, Mr. Terry says, "at various levels of market readiness," with the mortgage product in particular lacking Bankrate's depth. In addition, Advisor has rolled out in fewer cities.

Another concern for potential investors is Bankrate's price. It's not cheap. The company had a loss in its past 12 months. With expected earnings of 58 cents a share in 2012, according to Standard & Poor's Capital IQ, the forward P/E tops 40.

And yet: Despite being one of 2011's best-performing Internet IPOs outside of LinkedIn, the company still has just a handful of analysts covering it. Its current price of about $24 (U.S.) is less than 30 times the 2013 earnings estimate of 80 cents.

The Goldman Sachs squad, which has a "buy" rating and $26 (U.S.) target price, believes the company can grow its EBITDA, or earnings before interest, taxes, depreciation and amortization, at an annual rate of 30 per cent in the coming years. They're looking for "attractive and sustainable business models" whose valuations are also attractive, relative to their growth rates; Bankrate passes the test.

Google may indeed turn out to be a long-term threat to the company; in the near term, however, Bankrate should continue to post significant earnings gains and garner Wall Street attention. (Our typical caveat: One wrinkle in the growth story could send the stock crashing.) If all goes as planned, though, it should manage to maintain its lofty P/E – and produce gains for those willing to buy in today.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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