We’ve talked before about the earnings reporting season that is now wrapping up. The market seemed to adopt a pattern of punishing stocks that made even trivial mistakes far more severely than it rewarded good news.
As a result, I’ve had to be very confident in a company’s potential to feel comfortable owning it or recommending it through the quarterly report. One of my GameChangers companies that recently reported strong numbers for its seasonally-weak first quarter climbed nearly 7% the following day. The question now is whether there is more to come.
To answer that question, let me tell you more about the company I’m talking about.
DealerTrack Technologies Inc (NASDAQ:TRAK) provides web-based software solutions and services to all participants in the automotive retail industry, including dealers, lenders, original equipment manufacturers (OEMs) and aftermarket providers.
TRAK also operates the largest credit application network in the United States and Canada, which eliminates expensive and time-consuming inefficiencies in the old paper systems and decreases lenders’ costs of originating loans or leases. Before these products were available, dealers and lenders had to rely on fax and delivery methods for processing their offerings, which caused lengthy processing times, sometimes resulted in errors or omissions and increased the costs of assisting customers to obtain financing.
Today, dealers can instantly contact credit bureaus and their preferred lenders for a decision in just seconds.
TRAK integrates back office functions (such as accounting) with a dealer’s customer relations management software. This incorporation better enables a dealer to track consumer behavior and maintain active post-sales relationships to turn the consumer into a repeat customer.
All of DealerTrack’s products are offered on a web-based software-as-a-service (SaaS) model, which allows customers to utilize highly specialized applications without costly and complicated installations. The company is paid both on transactions processed and a subscription fee.
TRAK has grown nicely, with revenues increasing from $173.2 million in 2006 to $481.5 million in 2013 — an annual compound growth rate of 13.6%. While measuring profitability is somewhat complicated because of the company’s acquisition activity, I like that TRAK’s cash flows are strong since it was able to stay profitable on a pre-tax basis during the recession.
While TRAK stock was unusually volatile in 2014, I was pleased to see that results from the first quarter of this year were strong. Both earnings and revenue beat estimates on the Street — adjusted earnings per share of 19 cents beat estimates by a penny and revenue grew 59% to $252 million — and management was extremely upbeat on the conference call. In fact, the comment that stood out to me was one regarding how the company has managed to add so much to their capabilities over the last year, which should lead to growth for several years.
In addition, TRAK now offers complete back office management for dealers, along with digital marketing as well.
TRAK stock jumped nicely on the report, climbing nearly 7% to a near-term high, but I believe there is still plenty of sky left to grasp here. I believe we’ll see earnings comparisons turn positive by the third quarter of this year as acquisitions are further integrated into the company. And I was especially encouraged when management reiterated that they are likely finished with significant acquisitions for the next few years.
This company’s growth outlook is still extremely promising, and with EPS on track to increase nicely next year from $1.45 to $1.86, I believe we’ll continue to see TRAK outperform.
Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.
