DealerTrack (NASDAQ:TRAK), a network of auto dealers and lenders, is growing at a rapid clip - despite the increased interest rates, sagging U.S. auto sales, and financial distress of major automakers like Ford (NYSE:F) and GM (NYSE:GM). Ironically, those wrenching changes are boosting DealerTrack's prospects.
In the second-quarter earnings report released last week, revenues surged 49% to $43.4 million. Net income was $4.7 million, or $0.13 per share, which compares to net income of $1.1 million or $0.02 per share in the same period a year ago.
In terms of pro forma earnings, which excludes stock option expenses and charges for amortization (both non-cash items), DealerTrack had $0.22 per share in earnings, which was up from $0.08 per share in the same period a year ago.
DealerTrack is an electronic marketplace, similar to eBay (NASDAQ:EBAY). There are no auctions, however; the company links auto dealers with financing sources for purchases (such as banks, credit unions, and so on). The system automates the process, such as processing credit applications and identifying quality lenders.
The business model consists of two main revenue streams. About a third comes from monthly subscriptions for online tools, such as for auto dealers to compare financing/leasing options, prospecting aids, and insurance.
The other revenue stream comes from transactions, in which the company gets a fee for each credit application.
So how is the distressed environment in the auto industry helping DealerTrack? With higher interest rates, the inventory costs for auto dealers have increased significantly. Thus, using this software - which automates the often-inefficient processes of the sales process - is a big help. Also, DealerTrack provides many financing options for auto dealers, which increases the chance of a sale. Electronic contracts speed up the time-to-loan. Bottom line, it means auto dealers can spend more time selling cars, not processing loans.
Something else that is key to DealerTrack's growth is its large footprint of auto dealers, which increased 6% over the past year to 22,031. During this time, the number of financing sources increased from 141 to 243. This drives transaction volume, which over the past year increased from 13.5 million per quarter to 17.4 million.
It also means more opportunities to sell subscriptions, which increased 59% during the past year to 18,064.
So DealerTrack is intent on cross-selling and upselling into its expanding network. A big part of this has been acquisitions; recent deals include the purchase of Global Fax, which provides document management, and DealerWire, which helps with car inventory management.
With this momentum, it should be no surprise that DealerTrack upped its guidance. The forecast for revenues for 2006 is from $160 million to $165 million, which was a big jump from its prior guidance of $149 million to $154 million.
Prior guidance for pro forma earnings was $0.71 to $0.74 per share. The revised estimate is for $0.78 to $0.81 per share.
Assuming earnings of $0.80 per share, DealerTrack is selling at a forward price-earnings ratio of 27. That seems a reasonable level, given that the company is growing at nearly 50% per year. And with its expanding network and new services, it should be able to push growth for several years, making this an affordable growth play.
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Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
