Rock Financial Skips Into the E-Commerce Sea

The profitable Earth-bound mortgage lender isn't waiting until its lunch gets eaten to convert to the Web.
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Remember how Internet investors got all excited when Egghead -- now

Egghead.com

(EGGS)

-- announced last year it was closing all its bricks-and-mortar stores to be exclusively an e-tailer? Here's an opportunity for those same click-happy investors to get a piece of the rock.

Rock Financial

(RCCK)

, that is, a Bingham Farms, Mich., mortgage lender.

Rock Financial went public early last year on the strength of its business lending to people who have trouble qualifying for conventional loans. This messy business, euphemistically known as sub-prime lending, has the advantage of offering fatter profit margins to the companies that make the loans without going out of business in the process. At the time, Rock Financial had 24 retail stores and branches, and the Internet was barely a twinkle in CEO Daniel Gilbert's checking account. (Memo to Rock management: Contact

Gibraltar Steel

(ROCK:Nasdaq) in Buffalo, N.Y., and tell them you want their stock symbol. Offer stock options.)

That's all changed now.

"In March of 1998 we began to realize that the Web was going to be the dominant force in mortgage loan origination," says 37-year-old Gilbert, a Detroit native who still owns about 50% of the company he founded while studying law.

By January, Rock turned on its Web site, and last week the company announced it would shutter all but three of its 15 remaining retail branches, a la Egghead. (Incidentally, Egghead.com's shares have fallen all the way back to about 12, below where they were a decade ago.) In their place, Rock would build out its Web site, construct a 400-person call center in Michigan and service loans through a combination of toll-free calls and Web queries.

That makes profitable Rock Financial, which closed loans of $574 million in the first quarter (more than better-known

E-Loan

(EELN)

and

Intuit

(INTU) - Get Report

), the rare example of an terra firma merchant that didn't wait until its lunch had been eaten to convert to the Web. Its market value, at Tuesday's close of 17 7/8, is about $260 million, compared to E-Loan's $2 billion. (Intuit's business, as previously

noted, includes far more than mortgages.)

Now Rock is spending $20 million to market its Web operations. It also is scouting for opportunities to offer its service as a private label to other Internet players, guesses Michael Diana, an analyst with

Bear Stearns

in New York.

"Enough of that stuff is going to work to make today's valuation reasonable," says Diana, one of two analysts at major brokerages that follow Rock. Not surprisingly, Bear Stearns and

Prudential Securities

, the other brokerage that analyzes Rock's performance, underwrote Rock's IPO.

Is it a sure thing Rock's stock will rock? Of course not. It already rose on some e-nthusiasm to 40 1/4 this spring. And with its increased Web spending, Rock will end its profitability and at best break even for the rest of the year.

But on the Internet, that's good. Right?

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a monthly column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.