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Expense Woes, High Debt Levels to Hurt LendingTree (TREE)

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LendingTree, Inc.'s (TREE - Free Report) bottom line is expected to be under pressure due to higher costs. Moreover, a worsening credit quality is a major concern for the company and will likely hamper financials.

Also, analysts are not optimistic regarding the company’s earnings growth prospects. The Zacks Consensus Estimate for its current-year earnings has moved 44.1% downward over the past 30 days. Currently, LendingTree carries a Zacks Rank #5 (Strong Sell).

Further, the stock has declined 16.9% over the past year compared with the 7.3% decline for the industry.

The company's expenses have flare up significantly at a compounded annual growth rate (CAGR) of 34.4% over the period of three years ending 2019. This rising trend in expenses was due to persistent product development costs and advertising expenses. Although expenses declined in the first three quarter of 2020, the same will likely be elevated in the near term, exposing the company to operational risks. This might dampen the bottom line, in turn.

Additionally, LendingTree’s high debt levels are a headwind. As of Sep 30, 2020, it has a debt level of $603.5 million and a debt-capital ratio of 0.63, which has increased in the past few quarters. Further, with a time-interest-earned ratio of 0.2X, which has also deteriorated sequentially, LendingTree has a higher likelihood of default of interest and debt repayments if the economic situation worsens.

In addition, the company's capital-deployment activities are unsustainable. Over the past years, the bank had announced various stock repurchase programs. As of Sep 30, 2020, shares worth $179.7 million remained available for repurchase under these authorizations. However, LendingTree’s high levels of debt and inconsistent quarterly performances are likely to hurt these activities.

However, the bank remains committed to boost revenues by diversifying its non-mortgage product offerings . Over the last four years, LendingTree has increased its services such as credit cards and widened loan offerings to personal, auto, small business and student loans.

Along with the prevailing low interest-rate environment, the company's mortgage business is likely to get a facelift with a rise in refinancing.

Key Picks From the Sector

Ellington Financial Inc. (EFC - Free Report) has witnessed upward earnings estimate revisions of 14.7% for 2020 over the past 30 days. Also, this Zacks #1 Ranked (Strong Buy) stock has gained 55.3% over the past six months. You can see the complete list of today’s Zacks #1 Rank stocks here.

PennyMac Financial Services, Inc.’s (PFSI - Free Report) ongoing-year earnings estimate has moved up 14.6% in the past 30 days. Further, the company’s shares have gained over the past six months. At present, it carries a Zacks Rank of 2 (Buy).

Walker & Dunlop, Inc.’s (WD - Free Report) current-year earnings estimate has moved 14.5% north in 30 days’ time.  Additionally, the stock has appreciated over the past six months. It currently carries a Zacks Rank #2.

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