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LendingTree Aims to Boost Fee Income, Expenses Increase

Zacks Equity Research

LendingTree’s TREE efforts to reduce dependence on mortgage-related source of revenues is a tailwind as demand for mortgage products has declined due to higher interest rates. Its inorganic strategies to grow bode well for the long term.

However, lower mortgage-related revenues might offset the top line to some extent. Also, significant rise in cost base due to investments in product development and advertising, remains a concern.

On account of these downsides, the company failed to impress analysts regarding its earnings growth potential, as reflected in 1.4% downward estimate revision of the Zacks Consensus Estimate for current-year earnings over the past 30 days. The stock currently carries a Zacks Rank #3 (Hold).

Nevertheless, its price performance seems impressive. Shares have rallied 21.2% over the past three months compared with 7.8% growth of the industry.

Focus on bolstering fee income has proven to be a major tailwind for LendingTree as over a period of three years (ended 2018), non-mortgage revenues witnessed a CAGR of 78.3%. The company has increased its product offerings to include services such as credit cards, and has widened loan offerings to personal, home equity, reverse mortgage, auto, small business and student loans.

Also, LendingTree’s strong capital position enables it to undertake acquisitions. The latest buyout being of Value Holding Inc., the parent company of ValuePenguin.com, one of the personal finance online sites dealing in financial analysis of insurance to credit cards. The acquisition is expected to be accretive to LendingTree's adjusted earnings per share in 2019.

However, with the higher interest rates, mortgage business has slowed down, as mortgage rates are becoming expensive. Thus, the company’s mortgage product revenue source has been witnessing annual volatility, which might hamper top-line growth.

Further, LendingTree’s cost base escalated significantly at a CAGR of 46.4% over the period of four years, ending 2018. The increasing trend in expenses was due to persistent product development costs and advertising expenses. We believe continuation of such a trend exposes the company to operational risks and thereafter, will dampen bottom-line growth.

Stocks to Consider

Some better-ranked stocks in the same space are Essent Group Ltd. ESNT, PennyMac Financial Services PFSI and Walker & Dunlop WD. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Over the past 60 days, Essent witnessed an upward earnings estimate revision of 1.5% for 2019. Its share price has risen 56.2% over the past six months.

The Zacks Consensus Estimate for PennyMac’s current-year earnings has been revised 6.4% upward over the past 60 days. Its share price has increased 11.2% over the past six months.

Walker & Dunlop has witnessed an upward earnings estimate revision of 1.5% for current-year over the past 60 days. Its share price has improved 40.3% over the past six months.

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