New Position - Lending Tree, Inc. (TREE)
Seeing the forest through the TREE.
Sorry for the lame subtitle, I couldn't help it…
At any rate, as I have been trying to be more transparent I am writing about a move I made today. I decided to take a relatively small position in Lending Tree, Inc. This is a new purchase but I am a familiar with the company and have owned shares before.
I previously held for a short time in 2023, in reality I was in and out too quickly, buying around $16-$17 and selling for $21-$24. Not bad for a short holding period but the shares traded up to $77+ in the subsequent years before re-rating back to the $30-$40 range seen most recently.
The company reported yesterday and the market did not like the reduction in full year guidance or the commentary around a weaker SMB market than management initially anticipated. Additionally, the mortgage business remains under pressure due to rates but this has been widely known.
To be clear, the quarter was indeed not great and there are some real concerns in the SMB space. Add to that the intense competition in the space and the call seemed fairly bleak.
So why the heck did I buy?
A great question, which really boils down to two things. 1) Leverage and 2) Capital Allocation.
Leverage:
Ok I lied a little because I actually mean both operating leverage and financial leverage, so 3 three things…. From an operating leverage standpoint, the company should be close to a trough given the slow mortgage business seen over the past couple years and the weak quarter for SMB. Now, things can always get worse but from the signs given it seems we are at least close. The asset light model means when volumes pick up much of that turns into free cash flow. The financial leverage has been on a steady decline over the past few years and is now at a very comfortable level (expecting to end 2026 at 1.6x) and maturities are pushed out to 2030.
Capital Allocation:
Given the factors above, TREE should have free cash flow available to increase shareholder value. Now, they still need to make the right choices but they have optionality. Personally, I would love to see the company embark on a large buyback at these levels. Realistically, they will probably invest in some key initiatives and conduct some level of repurchasing. I also would not be opposed to some M&A (on either the buy or sell side).
Lesser Reasons:
Management also noted that they exited the quarter on a strong note with SMB activity. I don’t place a lot of weight on this given turbulent environment we are in but it was nice to hear. Additionally, the insurance business remains strong and was a bright spot in the quarter.
All that to say, I think there are several ways the company can unlock value given the depressed valuation and poor quarter. Over the past few years the company has shown improvements in its operations even with the pressure in mortgage. It may be an uncomfortable hold in the near term but I am okay with that. I like these setups where a number of different factors could lead to an increase in share price.