Bully the Treasury Market Part 2: LendingTree $TREE, Mr. Cooper $COOP

Hello and Welcome back to this new series of companies that I believe will be large beneficiaries of falling interest rates, if that is, my earlier thoughts were correct and Trump will be able to bully the 10-year treasury market to a 3% to 3.5% rate at some point in the first two years of his presidency. If you want a review of the thought process, please refer to yesterday’s writeup.

“Everyone has a book inside them, which is exactly where it should, I think, in most cases, remain.” - Christopher Hitchens

LendingTree (TREE) is a holdover from the dotcom era, having gone public in 2000, it is still 16% owned by the founder and CEO Douglas Lebda. After spending 30 years leading the same company, I wonder if Douglas Lebda has reached the limit of his potential. I’m not trying to be rude, most people don’t have one revolutionary tech company inside them, but as I listen to TREE’s earnings calls, I get the sinking suspicion that they will eventually get disrupted by the AI revolution, and that Douglas Lebda won’t be able to adapt fast enough to survive. In the meantime, however, I think it could make one heck of a rally back to past revenues and past multiples.

LendingTree is an online platform where people can compare quotes for personal loans, home equity loans, credit card rates, various kinds of insurance, etc. TREE makes money by selling high quality leads, you give them all of your information and even indicate what major purchases you are contemplating. TREE also makes money because their rate comparison is a pay to play marketplace, where insurers and lenders have to pay for the prime shelf space. It might take a few years, but I can only imagine Google salivating over completely taking over this niche.

In the meantime, on the last earnings call, TREE indicated that their relationship with and traffic from Google Search is better than ever. This is interesting because Chegg (CHGG) said exactly the opposite, that Google Search’s new AI overlay was diverting traffic away from their site at a dramatic rate.

In terms of inflection, half of the work has already happened. You might have noticed all kinds of insurance companies rallying for the last year or so, and TREE enjoys a decent amount of business from users comparing insurance rates. Management is guiding toward the next 18 months to be even better, and that is without strong guidance toward lower interest rates. Insurance alone can carry TREE out of their slump and back above breakeven, but the mortgage side of the business needs to be firing as well to get back to past peak revenues. With the Artificial Intelligence disruption threat, TREE might never get back to peak multiples, but certainly has room for some multiple expansion.

With four sequential quarters of improvement, the stock price has rallied up from the low of around $10 up to a recent high of $60, and back down to $40. Recently I have seen major price moves after around five quarters of sequential improvement, so there are good odds that there could be a price rally within the next six months, even if interest rates stay stubbornly high. This recent quarter had a dramatic improvement in revenue, but a surprising net income loss due to a non-cash impairment of past investments. These goodwill writedowns often provide buyable dips, and the fall from $60 to $40 is a bit of a gift for people like me who are late to this party. I had known insurance was rallying, but I didn’t think of LendingTree as a business affected by insurance.

TREE just delivered 3rd quarter results with $260 million in revenue, and the only 3rd quarter that beat that was in 2021 with $297 million in revenue. The recovery off of the 2023 lows is remarkable, and at this rate, TREE will be on track to deliver over $1 billion in trailing twelve month revenue as early as next quarter. If I cherry pick the worst sequential four quarters of 2023 and 2024, I would get a 12 month period with $638 million in revenue. That is a bold recovery considering the existing home sales market is completely frozen at levels not seen since the 1990s.

The insurance revenue was so strong last quarter, it would annualize to $676 million, but in 2021, at the prior peak of revenue, insurance sales were only $326 million. If all other segments could return to the 2021 peak, TREE would have around $1.45 billion in annual revenue. If those other segments grew just with inflation, Lending Tree could easily surpass $1.6 billion in annual revenue.

Due to TREE’s status as a tech company, in the past it has been valued as highly as 7x sales. I don’t have lofty aspirations that it will return to prior multiples, no matter how many times they mention Artificial Intelligence in their earnings calls. But a return to 2x sales would imply a market capitalization of over $3 billion and TREE trades at about $550 million today. This means that LendingTree could be a 5x within two years. I could easily dive deeper and discuss this business in more detail, but with the AI revolution, the most likely outcome is that within five years, Google will cannibalize this business. So it probably isn’t worth digging into the nitty gritty.

Mr. Cooper (COOP) is likely to be another beneficiary of an increase in mortgage origination volumes, but unlike TREE, it isn’t a value turnaround. COOP is a high quality growth stock with only about half of their business that has cyclicality to interest rates. About half of COOP’s business is servicing mortgages, the other half is mobile mortgage originations.

We can see that origination revenue has fallen off a cliff, but the servicing revenue has the ability to sustain the business during tough times. COOP’s revenues overall are cyclical, but the stability of the servicing revenue has been enough to prevent COOP from having a huge drawdown in price.

While the price action has been strong all this time, the multiples do not reflect how much this company can earn in a good year. Peak trailing twelve month net income income was over $1.5 billion, where today it is only $511 million. The current price to earnings ratio of 12x isn’t high considering the stickiness of the mortgage servicing revenue stream in a world where financials of a similar size routinely trade at PE ratios of 15x.

In a lot of ways, COOP reminds me of Jackson Financial (JXN), where sometimes a really strong stock that delivers incredible results sometimes just needs a few years to grind up to fair value. There is something about the market that gaps up aren’t trusted, and a quality growth stock needs years for the price to catch up. Servicing over 6 million mortgages, and having sticky, stable, servicing revenue growing at 38% year over year is not being fully appreciated by this market. Direct comparisons are few and far between, but there is a reason to believe that COOP could benefit from a multiple expansion of around 30%.

Regarding the imminent ability to refinance if interest rates were to fall, COOP is monitoring the number of mortgages they are servicing with interest rates over 6%. That is currently 20% of their portfolio. When interest rates fall, COOP has the contact information for over a million mortgage holders who are going to receive an offer to refinance their mortgages once rates hit that 5% to 5.5% threshold that is possible if Trump can bully his way to a 3% to 3.5% ten-year treasury. They are also monitoring the portfolio for home equity loans, over 80% of their portfolio have over $50,000 in home equity.

The downside for COOP is the executive compensation and lack of insider buying. About one third of the company is owned by KKR, and insiders have plenty of shares to sell, and are selling them frequently. While I would much rather have a founder CEO who built the company from nothing and watches every penny, hopefully the professional management can’t outspend Mr. Cooper’s income. COOP has a policy of engaging in about $50 million of share buybacks every quarter, and this has been enough to overcome stock based compensation, and to reduce share count from 100 million in 2018 to 66 million today. Now that the stock price has run up somewhat, the $50 million doesn’t go as far as it used to.

The rest of the capital allocation policy is acquisitions. Mr. Cooper just bought the mortgage portfolio of Flagstar for $1.3 billion. The transaction closed in November, and has not affected last quarter’s results. So not only will COOP benefit from organic growth from lower interest rates, they are benefitting from inorganic growth through acquisitions.

Analysts are guiding toward $13 per share of earnings in 2025. At a PE ratio of 12x, that would imply a share price of $156. Of course multiple compression could take away from those returns, but multiple expansion could benefit them. A PE of 10x would be a $130 share price, but a PE of 15x, which I believe this business warrants, would imply a 2025 share price of $195, about a double from here. While I often write about stocks that have the potential to be multibaggers, a 2x potential return seems a bit humble, but if you adjust it for quality and certainty, a safe two bagger is not a common thing to find. I might be a degenerate gambler, so I might prefer to buy something with more torque, but for those of you who prefer quality, Mr. Cooper might make a great component for your portfolio.