Homestore Back From Brink, But Looks Vulnerable to Crash

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Homestore Inc. seems to have turned itself around, with three consecutive quarters of positive net income, the settling of old litigation, and an infusion of private equity investment all just in time for the housing market to cool off.


Is the Internet real estate company late to the party or just in time for the after-party?


“Over the last couple of quarters, things have gotten increasingly more positive,” said Aaron Kessler, an analyst with Piper Jaffray & Co. “They’ve gotten all their legal issues behind them, and they’re going into next year with a clean slate for the first time.”


The latest positive sign came with word that private equity firm Elevation LLC was investing $100 million in the Westlake Village-based company, taking a 14 percent stake and two board seats. Menlo Park-based Elevation is focusing on media and entertainment companies, according to Greg Richardson, executive in residence at Elevation.


Homestore did not specify what it plans to do with the $100 million, other than to say it was for “strategic growth and acquisitions.”


Through the dot-com years, Homestore had acquired Web sites targeting the apartment rental market, the new homeowner market, the seniors market, and professional real estate agents. Though it doesn’t actually sell properties, Homestore’s model is to drive traffic to its Web sites.


That has at least one analyst worried. If the housing market cools, and there are fewer buyers, will traffic to Homestore’s online network remain high? And will advertisers still pay to place their ads?


“The company’s revenues and earnings are highly dependent on the health of the real estate market,” wrote Imran Khan, an analyst with JPMorgan Securities Inc. in a November research note. Khan rated the stock “underweight,” or “sell.”


But Khan seems to be alone. Five other analysts have “outperform,” and “buy” ratings. “A decline in the housing market would increase the sellers needed to up their advertising,” Kessler said.


The stock is trading in the $4-a-share range, up from the $2 a year ago. And the company eked out its third consecutive quarter of net income this month, earning $1.9 million, compared with a net loss of $4.6 million for the like period a year earlier.



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The company in its current form was founded in 1996. Its first project was an agreement with the National Association of Realtors to operate the organization’s Web site, Realtor.com. A year later, it forged an agreement with the National Association of Homebuilders to develop a Web site called HomeBuilder.com, which Homestore owns.


Agreements with America Online Inc. and Microsoft Corp.’s MSN Network funnel curious Web-surfers to the Homestore site, and Realtors in the national association direct clients to the online Realtor.com. Homestore.com had more than 8.5 million unique visitors in October, up from 7.8 million a year earlier.


“There’s going to be a continued transition from print to online advertising in real estate,” Kessler said. Realtor.com has 90 percent of all residential listings, and last year’s data showed that 74 percent of homebuyers consulted the Internet during their house-hunt.


“With demand abating, Realtors and homebuilders will now need to become more competitive,” said Jeetil Patel, an analyst with Deutsche Bank Securities Inc. “Homebuilders may be forced to aggressively market their home inventory to drive demand.”


Homestore has certainly gone through a lot, going back to 2001 when the Securities and Exchange Commission charged the company with inflating its revenues through bogus advertising barter transactions. Its stock price plummeted from $38 per share to $1.


Three former executives pleaded guilty to fraud in 2002 the former chief operating officer, former chief financial officer and a vice president. Former Chief Executive Stuart Wolff is currently fighting a criminal suit that alleges conspiracy and securities fraud.


After a slate of executive resignations in 2002, Mike Long became chief executive, vowing to turn things around. The company has been steadily investing in different areas, tweaking software and expanding its professional offerings and investors are optimistic that it’s paying off.

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