Homestore builds its empire, brick by brick

Amid the Internet wreckage, Homestore.com is emerging as the dot-com that could.

The profitable real estate portal further solidified its dominant market position by closing its $890 million buy of Cendant's Move.com and raising its 2001 earnings and revenue targets.

The acquisition, which was

Homestore Stock price from February 2000 to present.

Source: Prophet Finance

confirmed after market close on Tuesday, eliminated Homestore's largest competitor and gave it an undisputed leadership position in a market that has held up relatively well despite the recent economic malaise. In January, the Commerce Department reported new housing starts, or the number of homes that are being built, rose to 1.65 million, up 5 percent from 1.56 million starts in December. Analysts also said that interest rate cuts could boost home sales in 2001.

Under terms of the deal announced back in October, Homestore will buy Move.com and some of Cendant's related assets in exchange for 26.3 million Homestore common shares.

Homestore, which operates its flagship Realtor.com site, earns fees through advertising and client referrals and attracts visitors via arrangements with the National Association of Realtors, AOL Time Warner, Excite@Home, and Budget Group.

Cementing its position
The Move.com acquisition bolsters Homestore's already strong position. Homestore's Realtor.com site holds a commanding lead over competitors Homeseekers.com and Microsoft's HomeAdvisor.com, offering more than 90 percent of all real estate listings on the Internet.

Last week, the Justice Department said it cleared the merger but added that it would continue its investigation into some of the agreements between the two companies and will "endeavor to resolve that investigation as quickly as possible."

Homestore Chief Executive Stuart Wolff told analysts he expects the DOJ inquiry to conclude in the next few months, paving the way for a merger that "extends our leadership position in the real estate space."

The deal will boost Homestore's sales and earnings this year and will give the company access to more than 25 percent of the industry's brokers and transactions. The acquisition of Move.com will also give Homestore a better position in the rental listings market.

Cendant will now hold a 14.6 percent stake in the combined company. Cendant already serves a quarter of the real estate agencies in the United States. Homestore will be able to tap into more than 200,000 agents who complete roughly one-third of all the real estate transactions in the United States.

Perhaps the most valuable gem in the deal is a 40-year exclusive listing agreement with Century 21, Coldwell Banker and ERA, three of Cendant's prized national franchises as well as a seven-year pact with NRT and Rent.net, two prominent players in the online rental market.

The deal also calls for Cendant to purchase Homestore's technology and Web-based marketing products and vertical application service provider solutions.

Homestore boosts profit, sales targets
Wolff said the combined company will take a one-time charge of between $10 million and $15 million in the first quarter but added that the deal will boost both the top and bottom line.

Wolff said the company expects to break even on a pro forma basis in the first quarter, excluding the acquisition charge, while the company sorts out headcount and integration issues.

Chief Financial Officer John Giesecke, who separately was named the company's new chief operating officer, said the Move.com acquisition will add more than $93 million in sales in the fiscal year, bringing the company's projected total to more than $433 million.

Giesecke said the deal will add another nickel a share in earnings in the fiscal year, meaning it now expects to post a profit of 44 cents a share in fiscal 2001.

First Call consensus was expecting sales of $349 million in the fiscal year and a profit of 39 cents a share.

"Our top priority is to maximize our top-line potential," Giesecke said. "We hope to have all of these new assets integrated within the next 90 days."

Giesecke added that fiscal 2002 sales and earnings should come in at $600 million and 84 cents a share, respectively. In its fourth quarter, Homestore beat estimates with a profit of $3.3 million, or 4 cents a share, on sales of $79 million. Sales were up 79 percent sequentially.

Analysts are upbeat
Wit SoundView analyst Shawn Milne stopped short of calling the approved merger a monopoly but concedes the deal puts Homestore in a unique position.

"I wouldn't use that word," Milne said of the monopoly analogy. "Their competitive position is definitely much stronger in this space. But considering that it will do about $150 million in online ad revenue this year, that's only a small percentage of the total real estate advertising money that comes from TV, newspaper and other advertising outlets."

Analysts following Homestore issued upbeat comments about the merger and the stock's potential.

"We believe the transaction should be perceived very favorably. Acquiring the second most popular online real estate network, solidifies Homestore's leadership position," said Tonia Pankopf, an analyst at Goldman Sachs. "The complementary combination should fuel Homestore's revenue growth and will be accretive to the already profitable company."

Merrill Lynch analyst Henry Blodget, who reiterated his "buy" rating on the stock, said Homestore will also get a boost from a deal with AOL Time Warner launched in September. Homestore's monthly unique visitors have increased from 4.6 million in September to more than 5 million in January.

"We believe by the time the anniversary of the AOL launch comes around, that Homestore will have doubled its average monthly unique users to 8 million," Blodget said in a research note. "While we are not counting on ad revenue to drive any of the upside in Homestore's numbers, the increase in page view inventory should help support our current estimates."

Ad worries?
But there are a few wild cards. Homestore has not been shy about embracing online advertising as a key revenue stream. In fact, 48 percent of its sales in the fourth quarter came from advertising.

If real estate advertising and listings decline, Homestore could see a slowdown even though it owns a dominant position.

Analysts shot down those concerns, which have hurt Homestore shares recently. "This company has a diversified revenue mix," Pankopf said. "The advertising sales it receives come from well established companies in the real estate space."

Wit SoundView's Milne said Homestore enjoys a distinct advantage over other general Internet portals in terms of advertising clientele and partnerships.

"They can offer targeted, consumer-buying advertising that's specific to its space," he said. "If you look at its site, you can see how much the quality of its advertisers has improved in just the past six months."

Bank of America, Budget Group and Kodak are just some of the corporate giants who have signed sponsorship deals with Homestore during the past year.

Company executives said subscription sales will account for about 64 percent of its total sales in fiscal 2001, demonstrating that while Homestore has quality advertisers, it recognizes that substantial growth will come from its application sales.