Wednesday, December 23, 2015

9th AIM student equity update (by Dylan Harkness): Lending Tree (ticker: TREE): Money Grows On This TREE!

TREE (Lending Tree): Not Your Typical Financial Services Company
By: Dylan Harkness, Student at Marquette University

Image result for lending tree logo

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

• Lending Tree (TREE) operates the nation's leading online loan marketplace and provides consumers with an array of online tools and information to help them find the best loan for their needs.

• The firm should follow in the footsteps of the travel industry in regards to rapid online adoption and matching functionality (i.e. Kayak, Priceline, etc.).

• Currently TREE has 400 plus lenders on its network (the newest is American Express) and has built up a 2MM plus consumer subscriber base on the My Lending Tree platform.

• They offer an appealing upside that should create above normal returns for a firm in the normally staid financial services sector.

Lending Tree, Inc. (NYSE:TREE) is on the riskier side for a financial services stock, but it is a reasonable investment that is intended to add a different return opportunity to the rather boring financial portion of the AIM domestic equity fund. Currently the financial holdings in the portfolio are barley outperforming the benchmark, but who wants to barley outperform? Playing it safe may be the goal for some investors, but the financial sector analysts want to outperform by holding stocks other than small regional banks and insurance companies – and Lending Tree is just the ticket!

We view the online loan marketplace as mirroring the online travel industry in terms of matching consumers with deals. 15 years ago people would go to travel agents to book a family vacation to visit grandma and grandpa in Naples, Florida. Now people are simply using online travel sites such as Kayak and Expedia, to find the best deals on flights, hotels, rental cars, and packages. This is what I see TREE turning into for the online loan marketplace. It is possible that in a few years most people will rely on online loan marketplaces, such as TREE, in order to get the best loan deals from the most reliable institutions.

TREE is already extending its branches by implementing the My Lending Tree platform which attracts customers by delivering a credit score, report, and monitoring free of charge. With basic customer information, TREE can successfully recommend the best deals on mortgages, student loans, personal loans, and credit cards. The My Lending Tree platform has seen phenomenal growth, growing from 200K users in 2014 to more than 2MM as of Q3 2015. The platform has also been adding real value to customers – so far identifying ~$500MM in potential savings opportunities.

What has the stock done lately?
The stock has seen a nice move in Q4 due to a generous upgrade from the analysts at Bank of America - and the addition of American Express to its lender network. Performance in December is off 10%, which provides a better entry point. The stock saw an increase after the Fed’s announcement of an interest rake hike last week because TREE has successful diversified its portfolio to hedge against rising interest rates by adding more loan matching abilities other than simply mortgages.

Past Year Performance: TREE has increased 125% in value over the past year, but the stock is still undervalued in my opinion. TREE's market valuation still represents an undervaluation of more than 50% according to my discounted cash flow and relative value calculations

Source: FactSet

My Takeaway

TREE - and the other online loan origination businesses - should follow in the direct footsteps of the travel industry. This is a good example of an industry disruptor.  It is my inclination that in the years to come the majority of loans will be almost completely sourced online. With the largest market share, TREE already possesses a head start, which is something investors seeking to add alpha to their portfolio prefer. If you want to make modest returns in the financial services sector, then buy insurance company and regional banks; however, if you want to diversify and earn excess returns, then climb the Lending Tree! 

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