As you’ll recall, this year’s best-performing Top Pick at the time we published our update issue was a homebuilder. Earlier this week, one of our contributors sent an email with the subject line, “U.S. Housing Market Has Not Just Bottomed, It Is Rebounding.” In short, all signs — including most housing-market related statistics and measures — point to a healthily growing housing industry. That has not been lost on our contributing analysts and editors, several of whom are now recommending housing-related investments. Today’s Daily Alert features one, a tech-stock play on the theme, from the latest Personal Finance. Here’s the recommendation from Editor Elliott Gue.
“The residential mortgage business has always been a complicated one, requiring hundreds of hours of staff time to shepherd a loan from origination to closing and servicing. That process has only become more complex over the past few years, as the number of required disclosures soars because of previous fraud during the boom times.
“Ellie Mae, Inc. (ELLI) operates one the largest electronic mortgage origination networks in the U.S., providing software to the residential mortgage industry that’s geared to simplify processes. The company’s main software product is its Encompass loan origination platform that can perform a variety of functions, from document and compliance management to income verification and customer relationship management. While customers have the option to license the entire platform, that can be an expensive and time-consuming proposition. Because Ellie Mae focuses primarily on selling to small and mid-sized operations that can’t always make that kind of investment, it recently began offering Encompass on a Software as a Service (SaaS) basis, whereby the soft- ware is provided to users via the Internet rather as than individual copies for storage on each PC and laptop.
“In addition to SaaS reducing up-front costs and allowing users the flexibility to customize the functionality of the product, Ellie Mae also offers SaaS users two pricing models: they can either pay a set subscription fee, or a ‘success-based’ fee that’s only charged when a mortgage is successfully closed. This flexibility has allowed the company to make significant headway with smaller operations over the past couple years, boosting Encompass to nearly 30,000 users — it added 5,000 users in the first quarter alone — while actually increasing revenue per user by 77%.
“SaaS revenues increased 137% year over year to $8.4 million, or 40% of total company revenue. The remainder of Ellie Mae’s revenues comes from its mortgage origination network that connects originators, underwriters, investors and almost anyone else involved in the process. Integrating all of those disparate users on a single platform speeds up the process, reduces costs and limits the possibility of errors. Currently about 59,000 industry professionals connect to the Ellie Mae network, with the company getting paid on a per-transaction basis.
“Since going public in 2008, the company’s annual revenues have grown from $34 million to $55 million. Earnings per share (EPS) have also accelerated substantially, growing from just 5 cents in 2010 to 24 cents last year. EPS is forecasted to reach 44 cents this year and 62 cents next year. Although a fairly young company, Ellie Mae already has almost $30 million in cash on its balance sheet with solid cash flows and no debt whatsoever.
“Ellie Mae has demonstrated that it can thrive in tough environments. The company’s brisk growth should continue, as the real estate market improves and documentation and compliance requirements become increasingly onerous. Ellie Mae continues to develop new product offerings to supplement its Encompass platform. And given the extremely fragmented nature of its industry and the company’s acquisitive nature — it has picked up 10 companies over the past year — Ellie Mae is likely to acquire a few cheaply valued competitors this year. With impressive growth prospects in an improving market, Ellie Mae is a buy under 20.”
- Elliott H. Gue, Personal Finance, July 11, 2012