Value in HouseValues

11/11/2005 12:00 am EST

Focus:

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

"Some 77% of home buyers use the Internet in their research, yet realtors spend only 4% of their ad dollars online," notes Ian Wyatt , a specialist in small-cap tech stocks. "This disconnect creates an opportunity for HouseValues, which helps realtors find online leads."

"There are currently 1.2 million real estate agents in the US. While there are big name firms that span all 50 states, most operate as franchises, with individual agents being responsible for advertising and marketing. Yet, most realtors lack formal marketing training, and thus focus their efforts on the conventional methods such as direct mail and classifieds. HouseValues (SOLD NASDAQ) assists real estate agents in generating qualified customer leads.

"Realtors subscribe to the HouseValues service, which provides them with a guaranteed number of unique leads each month. It drives traffic to its Web sites through online and TV advertising, which offers visitors information on the value of their home (for sellers) or homes on the market (for buyers). The company then collects information from its users, and provides that information on an exclusive basis to realtors who participate in the company's online advertising program.

"HouseValues is also working to educate realtors and provide them with tools to make the Internet a viable and measurable advertising medium. Its Market Leader CRM solution allows real estate agents to better organize their sales process by managing leads and communicating with these individuals. In addition, HouseValues also provides subscribers with extensive training through seminars, conference calls, and an online learning center.

"We believe HouseValues is the best positioned company to take advantage of the trend for realtors to move some of their advertising dollars away from traditional print media, and toward the Internet. HouseValues has made great strides since being founded in 1999, and now counts more than 15,000 individual realtors as its subscribers. However, with a market of roughly 1.2 million, HouseValues has penetrated only 1.25% of the potential market at this time, creating a significant market opportunity.

"One of the common investor concerns is that the company's business is tied to the health of the real estate market. This is true to a certain extent, as a hot real estate market means a greater number of homes are on the market and changing hands. On the other hand, in this environment, real estate agents have less trouble selling homes, and therefore are less focused on their advertising and marketing plans. As a result, if there is a prolonged downturn in real estate, the increased need for realtors to market could balance out a slowdown in transaction volume.

"Revenues have grown 90% from $25.1 million in 2003 to $47.7 million, with the company's earnings per share growing from $0.18 to $0.34. Analysts polled by Thomson First Call expect 2005 earnings per share of $0.50 on revenues of $86.27 million. For 2006, consensus estimates call for earnings to grow 42% on revenue growth of 38%. As a result of its magnificent historical growth, and the long-term prospects for the stock, we are adding the company to the Growth Report portfolio. Our 12-month target is $22."

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