I sent this out to family and friends last weekend:
The first thing that I do is try to figure out future winners and losers. What segments of the industry will be impacted by lower car sales? We already know about parts suppliers; the shorts have gone there and picked their bones clean. I have chosen to look at auto dealers. More specifically, those companies that provide services to auto dealers.
I’ve built up a decent short position on TRAK over the last week. It sells software solutions to auto dealers, allowing dealers to offer loan packages and other products (extended warranty, etc) to customers. It is currently trading at ~$13/share. This stock has a very small short position; ~5% so it makes for a great short play. Their revenue model is partially based on subscriptions and partially based on per use (a new car loan would be a ‘per use’). Both of these are falling, although I see limited further revenue reductions in their per use side of revenues.
The per use is dependent on the number of vehicles sold. In the US, we went from a 17 million new vehicle seasonally adjusted annualized rate of sales (SAR) in 2007 rate to a current ~9.4 million SAR. That’s put TRAK into the red and they have had negative income for the last three quarters (-.07, -.03, and -.14). I personally expect new vehicle run rates to drop somewhere in the 8 million range and stabilize there, although that’s a pretty big WAG (wild assed guess; it’s a technical term - LOL) on my part. April’s numbers came in with a 9.3 million SAR. I’m waiting to see May’s numbers; it should be interesting with the Chrysler bankruptcy and the likely GM bankruptcy. To go further on this point, my thesis is based on my belief that households own too damned many cars per driver. How many households have two drivers yet have three/four/five vehicles? I don’t live in an upscale San Antonio neighborhood but I see plenty of houses with 3+ cars. This is overconsumption and I believe that it is one area where many households will reduce spending even further than we’ve seen. OK, back to the stock analysis.
Let’s look at the subscription side of the equation. A subscription is held by a single dealership. The number of dealerships is shrinking rapidly and TRAK’s subscriptions are now going to hammer TRAK’s earnings even worse. TRAK recently did a couple of acquisitions of competitors in order to achieve their current market penetration of approximately 55% of all dealerships. According to their last conference call, that’s a pretty steady percentage across all manufacturers. Here’s how TRAK is going to get royally screwed. Chrysler has announced that they’re dropping just under 1000 dealerships and GM plans to drop more than 2500 dealerships. In the last conference call, TRAK’s CEO estimated that the impact of closing 2900 dealerships would result in an additional $6 million in losses in the second half of 2009. Assuming he’s talking a 6 month period, that equates to $1 million/month; $3 million/quarter. With 39 million outstanding shares, the quarterly losses will increase by a little more than 7 cents per share. (It doesn’t sound like much, but keep in mind that this company’s earnings are measured in pennies and nickels, not dollars, hence the low stock price). The next earnings report isn’t until July, covering the April through June timeframe. It’s going to be ugly; I just don’t know how bad yet. I’ll have to dissect monthly car sales for May and June before I’ve got a good handle on how big a loss TRAK will have on the per use side this quarter; it’ll be a bit more of a crap shoot to guess on the number of subscriptions lost.
Let’s get into some basic numbers. TRAK had $148.7 million in cash/equivalents on hand at the end of March 2009. That compares to $203.2 at the end of December 2008. $33.8 million of that was due to the acquisition of a competitor, AAX. So the cash/equivalents burn for Q1 excluding the acquisition was $20.7 million. And their cash burn has been accelerating. A positive for TRAK is that they have almost zero debt.
The AAX acquisition cost TRAK $33.8 million. As a result of the acquisition, TRAK booked $15.3 million in goodwill. In layman’s terms – they bought assets valued at $18.5 million for $33.8 million. Currently, TRAK has $129 million in goodwill on their books. That’s a bit more than $3/share in goodwill added to the book value of $10.18/share and decreasing quarterly.
TRAK’s comptetition currently consists of AppOne, CUDL, Finance Express, RouteOne, and Open Dealer Exchange. The first four are small private companies. The fifth, Open Dealer Exchange, is a new joint venture between ADP and Reynolds and Reynolds formed on 21 Jan 2009. Reynolds and Reynolds is a small private company that’s been in this business for a while, but ADP is a mega software company with $9 Billion in sales. ADP is the 800 pound gorilla that just entered the room. They have the mass to crush competition and have the efficiencies of scale to make money while pushing prices lower. Until now, TRAK was the 800 pound gorilla, but compared to the backing that Open Dealer Exchange has, TRAK is a small primate. I don’t see this ending well for TRAK’s market share.
Back to TRAK’s subscription numbers. At the end of Q1 (march 2009), TRAK had 14,646 subscribing dealers. TRAK’s end of Q4 (Dec 2008) numbers were ~12,300. With their acquisition of AAX in Q1, TRAK changed their subscription packages to include more bundled items, raising the subscription prices – and TRAK picked up more than 350 subscriptions from the acquisition of AAX. In spite of raising subscription prices, it appears that subscription revenues remained flattish. I’ll need to dig further; it’ll probably require me to dig up Q1 Q2 Q3 2008 subscription revenues and subtract it from the 2008 subscription revenues of $94.7 million. Q1 2009 subscription revenues were $27.9 million.
What’s going to be the impact to TRAK with each dealer (subscription) lost? From their Q1 report, the average monthly subscription revenue per subscribing dealer is $635. That’s $1905/quarter. I’m sure that you’ve seen where several dealerships have gone bankrupt throughout the country. I don’t have a good figure on this; I’ll have to do some more research. And don’t forget competitors poaching of TRAK’s business from competitors. I think that with the increased subscription costs, TRAK will see many dealers leave them for lower priced alternatives.
TRAK’s accounts receivable have been increasing. That’s because their subscribing dealers are either paying much more slowly or declaring bankruptcy and not paying at all. This was cited in their quarterly report; so far they’ve got ~$3 million in questionable accounts receivable that are still on the books. This number’s going to increase as more dealerships fail.
TRAK's customer base is shrinking at the same time that they’re facing very tough competition. TRAK was only marginally profitable during the good times; their net income was approximately 45 cents per share in their best year, 2007. Their net income was around 4 cents a share in 2008. They will have a loss for 2009 and I don’t’ see that improving. They’re rapidly burning through cash and equivalents; this company could easily go bankrupt.
Keep in mind that this stock was trading at ~$9.50/share per share in March, so it’s had a ~35% runup in price in the last couple of months. Last fall when this stock was trading $20 range, I bought a bunch of put options on them which paid a boatload of money in the Sep/Oct meltdown. But this time, I am shorting the stock directly. I’m doing that for three reasons. First, I had to pay a significant premium on the puts due to them being thinly traded. Second, I don’t see much more upside to the stock and I think that it’s now at the point where it’s about to roll over and approach $5/share. Third, in spite of the low daily volume, the stock is very liquid and it’s very easy to locate shares to short. There will be no short squeeze on this stock because the short interest is very small.
I hope that this helps everyone in getting an idea of some of the drill that I go through when choosing a stock. If anyone sees a mistake or has a suggestion of other things for me to look at, I’d appreciate the inputs.