2013 was a banner year for the auto industry, the best since 2007. New car sales were up 9.2% and reached 15.6 million.
My colleagues and I have been researching the best ways to invest in the automotive rebound. My 100k Portfolio subscribers have seen profits of 293% from Tesla Motors (NASDAQ: TSLA) in less than one year. Recently I’ve been digging into General Motors (NYSE: GM) and Ford (NYSE: F), while adviser Tyler Laundon has his eyes on used-car dealers.
But in late December, I learned about a unique way to invest in the auto rebound. And today, I’ll share all the details of this opportunity.
Here in Vermont, there aren’t very many large or public companies. You may be familiar with a few of the well-known Vermont brands – Ben & Jerry’s, Green Mountain Coffee Roasters (NASDAQ: GMCR) and Seventh Generation.
But one of the premier local growth companies is Dealer.com. The company provides online marketing services to 7,000 car dealers across the U.S. With 700 employees in Burlington, Vermont, and revenue estimated to be $230 million last year, the company is an important player in the local business community.
Dealer.com has a great entrepreneurial story: young entrepreneurs operating a used-car dealership decided in 1997 that the Internet would be an important opportunity for dealers to connect with customers. Since there weren’t any ad agencies or online marketing tools designed for car dealers, the guys started Dealer.com.
The company has since grown into a full-service digital ad agency for car dealers, building websites and managing search engine marketing and other online advertising services for its clients.
Rumors had been circulating that the company was preparing for an IPO. But on Dec. 19, Dealer.com announced its acquisition by Dealertrack Technologies (NASDAQ: TRAK) for $1 billion. That’s a pretty big acquisition for Dealtrack – which is valued at just $2 billion.
Dealertrack is in the business of providing software solutions to the automotive industry. The company’s software provides a system for managing inventory, vehicle registration and financing. One nice part of the company’s business model is that it gets paid for every credit application, vehicle title or registration by its network of car dealers.
The company has become a dominant player in the automotive software niche, with 18,000 car dealer clients in the U.S. and Canada using its solutions. In 2013, the company’s revenues are expected to grow 23% to $479. Adjusted earnings per share — which exclude expenses such as stock options — are estimated to be $1.30.
By acquiring Dealer.com, Dealertrack will immediately grow its revenues by 50%. Additionally, Bloomberg reported that Dealer.com had cash earnings — also known as EBITDA — of about $50 million in the last 12 months.
Dealer.com is also growing its revenues by more than 20% per year. This acquisition will help Dealertrack continue to grow by cross-selling Dealer.com marketing services to its large client base.
Since the acquisition, Dealertrack shares have jumped 15%. That appears to be an initial vote of confidence for the acquisition. But with the stock up 63% over the last year, should you consider buying it today?
Assuming that the combined company continues to grow at around 20%, revenues could be around $850 million in 2014. Meanwhile, the company’s EBITDA should be around $200 million and non-GAAP earnings around $100 million or $2 per share.
With Dealertrack shares trading around $50, the company’s market cap will be roughly $2.5 billion (after accounting for the additional shares issued to acquire Dealer.com). That means the stock is valued at around 3 times forward sales or 25 times earnings.
Compared with the S&P 500, that’s not exactly cheap. But when you consider the valuations of specialty software companies, Dealertrack actually begins to look attractively priced.
The following table shows the valuations of several software and web-marketing firms in niche industries including real estate and restaurants. As you’ll see, the new Dealertrack is attractively valued compared with these other stocks.
Richly Valued Software Stocks
|Company||Ticker||Price / Sales||Price / Earnings|
* Valuation multiples based on 2014 estimates
Dealertrack and Dealer.com have been able to grow their businesses during a time when new car sales lagged. A large part of the reason is that these companies profit from the sale of both new and used cars. Continued growth of new car sales could provide a nice tailwind for this company in 2014.
If you’ve bought a new or used car in the last few years, chances are that Dealertrack or Dealer.com supported your purchase. It may have been that Dealer.com built the web site where you found your vehicle. Or Dealertrack processed your credit application and vehicle registration. Yet most consumers and investors have never heard of the company.
The fact that Dealertrack is still undiscovered creates an opportunity for investors. If the company is given a similar valuation to its specialty software peers, this stock could surge 50% to 100%. If I were the CEO of Dealertrack, I’d seriously consider renaming the company Dealer. That alone might give the stock price a little boost.
A crushing blow to Honda and Toyota
Ian Wyatt recently discovered Japanese automakers have a hidden weakness. And it’s something so devastating, it could bankrupt the likes of Toyota and Honda. It all has to do with one rapidly growing company based right here in the U.S. Each month, its revolutionary product steals away more market share, taking millions in profits away from foreign competition. It’s opening up new operations along the East Coast and in California, Texas, Washington, and Illinois. Soon it will be everywhere. Before this stock moves any higher, click here for the details of the wealth-building opportunity I call, “The New Highway Being Built Across America.”