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Company overview

Autobytel (NASDAQ:ABTL) provides auto dealers and manufacturers solutions to efficiently and effectively market and sell new and used vehicles by providing high quality customer lead referrals, marketing and data analytics and online advertising. ABTL believes it has the nation's largest distribution network.

Consumers submit leads through Autobytel.com or third party sites. Autobytel.com provides consumers free, value-added information to assist in the vehicle shopping process. Vehicle lead fees paid by dealers and manufacturers account for ~ 96% of revenues and advertising accounts for ~4%.

Direct competitors are all private and include Dealix, Auto USA, Edmunds, TrueCar, Kelly Blue Book, Cars.com, AutoTrader and Cars Direct. The recent closing of Vehix should continue the shift towards the strongest companies with unique competitive advantages.

Dealers continue to invest in proprietary websites and traffic acquisition activities, however ABTL's proven track record and long standing customer relationships mitigates this risk.

Ticker

ABTL

Exchange

NASDAQ

Country

U.S.A.

Sector

Technology

Industry

Internet Information Providers

Price

$4.21

Shares outstanding

8,863,400

Insider ownership

9.6%

52 week high/low

$4.65/$3.37

Market cap

$37.3 million

Revenue

$68.4 million

Cash net income*

$4.6 million

Cash

$14.7 million

Debt

$5 million

*Net income + non-cash stock compensation + D&A

Revenue and cash net income based on ttm

2010

2011

2012

2013E

2014E

Revenue ($M)

51.5

63.8

66.8

71.9

77.48

Gross profit ($M)

19.5

26

26.3

28.76

30.992

Gross margin

37.8%

40.7%

39.3%

40%

40%

Operating expense ($M)

28.5

25.3

24.7

27.0

29.1

Operating margin

-17.5%

1.1%

2.4%

2.4%

2.4%

Net income ($M)

-8.6

0.4

1.4

1.5

1.6

EBITDA ($M)

-7.0

3.2

4.2

4.5

4.9

Operating cash flow ($M)

-4.3

2.2

5.8

6.2

6.7

Cash flow ($M)*

-5.9

4.2

5.1

5.5

5.9

Cash net income ($M)**

-6.1

3.5

4.5

4.8

5.2

Diluted EPS

-0.19

0.04

0.15

0.19

0.43

Source: Company filings

*EBITDA + non-cash stock compensation

**Net income + non-cash stock compensation + D&A

2013 and 2014 revenue and EPS based on analyst consensus

2013 and 2014 margins conservatively estimated to remain stable

Source: SEC filings

Dependence on vehicle sales should decrease as expansion across the entire vehicle ownership cycle continues.

Source: Company presentation

Continued investment in the flagship Autobytel.com website (new features, content, functionality, search engine marketing/optimization), new mobile offering and YouTube channel to drive traffic increases resulting in higher quality lead volume at a lower cost.

Source: Company presentation

Industry outlook

The auto market continues to improve led by the ongoing economic recovery and should drive increased lead submissions. Dealers are increasing marketing budgets in order to take advantage of increased buying activity.

The Internet is (and has been for some time now) the primary and most effective tool used by consumers in the vehicle buying process while dealers and manufacturers use the Internet as an efficient and effective way to reach consumers.

J.D. Power and Associates reported in 2012 that 80% of all U.S. new light vehicle consumer buyers use the Internet as a primary vehicle research and shopping tool.

The risk of a slowdown in auto sales is mitigated by a positive economic outlook (e.g. falling unemployment rate, rising housing prices/starts/sales) and an accommodative Fed.

Source: Company presentation

Investment thesis

ABTL is an attractive way to gain exposure to the recovering auto market due to the following positive factors:

Low valuation

P/E (2013E)

22.16

PEG

0.83

P/E (2014E)

9.79

PEG

0.08

EV

27.60

EBITDA (TTM)

4.20

EV/EBITDA

6.57

EV

$27.60

Revenue

$68.40

EV/Revenue

0.40

Operating cash flow

$4,500,000

Capex

$931,000

FCF

$3,569,000

FCF yield

9.56%

Source: SEC filings

Complete financial turnaround. As shown in the income statement above, margins, net income and cash flow posted a dramatic reversal. ABTL went from losing money to posting triple digit EPS growth in three years.

ABTL posted strong 1Q13 results:

  • Highest quarterly revenue in five years (up 9.3% and beating estimates)
  • Net income growth of 32%
  • EBITDA growth of 13%
  • Cash/cash equivalents growth of 22%
  • Issued higher revenue guidance for 2Q13 ($17-18 million)
  • Delivered ~ 1.2 million automotive leads (highest lead volume in company history) up 13% over last year's first quarter

Source: Company presentation

Going forward, revenue growth to be driven by increased sales of higher quality leads that command higher prices, introduction of new products and services (iControl, WebLeads+, Email Marketing Manager, Lead Call, database offerings) and increased advertising due to more website visits.

Margin expansion (gross margin up 490 bps since 2009) to be driven by increasing percentage of higher margin, higher quality internally generated leads, focus on top producing dealers who purchase more internally generated leads, aggressive cost control and less exposure to cost volatility of third party leads. This shift is led primarily by investments in the website, mobile offering and YouTube channel.

Source: Company presentation. Orange represents higher quality, higher margin internally generated leads. Blue represents leads purchased from third parties.

Financial strength. Cash of $14.7 million vs. debt of $5 million, unused $8 million revolving credit facility.

High operating leverage. In 2012, revenue rose 5% while EPS more than tripled. Next year, expected revenue growth of 8% to result in more than doubling of EPS.

Strong cash flow. High free cash flow yield of ~10%.

High quality leads. Consistent delivery of high quality leads (measured by conversion of lead to vehicle sale) provides competitive advantage and strong pricing power.

Past and current investments mentioned above (e.g. website, mobile, YouTube) expected to result in higher lead quality. Autobytel.com leads convert to sales on average at a rate of ~ 24% (according to R. L. Polk), sales conversion rate is 3x estimated industry average of ~ 6% to 8% and overall leads sold by ABTL accounted for ~ 4% of all new retail car sales in the U.S. in the past two years. Internally generated leads (from Autobytel.com website and search engine marketing campaigns) account for ~ 60-70% of total lead volume.

Stock buybacks. Last year completed $1.5 million stock buyback at average price of $3.83 vs. current price of $4.21. Last June announced additional $2 million stock buyback.

Patent holdings. Holds patents related to on-line aftermarket accessory shopping, managing leads in data center systems as well as routing them to one or more destinations. Applied for service marks and patents on proprietary iControl by Autobytel technology and proprietary lead distribution engine. Transferred ownership of patent related to innovative method and system for forming and submitting a lead over the Internet to Lead Relay, a special purpose entity formed for the purpose of pursuing further monetization of the patent. In exchange, ABTL will receive a royalty interest equal to 50% of net revenues obtained from litigation judgments, settlements or licensing.

Diversified customer mix. Top three customers [AutoNation (NYSE:AN), General Motors (NYSE:GM) and Urban Science Applications acting on behalf of Audi, Infiniti, Mercedes-Benz, Mini, Nissan (OTCPK:NSANY), Smart, Subaru, Toyota (NYSE:TM), Volkswagen (OTCPK:VLKAF) and Volvo (OTC:VOLAF)] account for only ~ 26% of revenues in 2012.

Right management incentives. Performance options based on meeting EBITDA goals not EPS which can be manipulated by stock buybacks. Insiders own ~10% and have not sold any shares in past two years.

Significant net operating loss ("NOL") carryforwards. As of December 31, 2012, ABTL had federal and state NOLs of ~ $106.4 million and $65.9 million and begin to expire in 2021 and 2013, respectively.

Important note: Shareholders approved a rights plan (triggered if investor acquires 4.90% or more of shares) to preserve important tax assets, which may be forfeited in a takeover. Furthermore, a staggered board places an additional burden on any activist investor. However this plan does not preclude investors (even institutional) from taking a significant, passive stake as evident by the standstill and voting agreement with Mercury Management last year.

Peer comp

ABTL is more attractive than alternative auto plays such as dealers, manufacturers or parts retailers for the following reasons:

First, the high one year returns (parabolic in some cases over past month) and valuations of the auto dealer, manufacturer and retailer stocks heavily discount the auto recovery. The low risk/high reward investment is in ABTL (up 10.8% over past year with EV/EBITDA of 6.6x).

Auto dealers

One year return (%)

EV/EBITDA

CarMax (NYSE:KMX)

73.9

20.2

Penske Automotive Group (NYSE:PAG)

36.7

13.8

Group 1 Automotive (NYSE:GPI)

27.2

11.8

Lithia Motors (NYSE:LAD)

120.9

12.2

AutoNation

33.8

13.1

Asbury Automotive Group (NYSE:ABG)

63.3

10.6

Sonic Automotive (NYSE:SAH)

60

10.5

America's Car-Mart (NASDAQ:CRMT)

15.1

9.4

Average

12.7

Auto manufacturers

One year return (%)

EV/EBITDA

Ford (NYSE:F)

54.4

11.9

GM

57.8

5.1

Toyota

70.9

11.4

Honda (NYSE:HMC)

31.2

8.4

Volkswagen

41.3

7.9

Daimler (OTCPK:DDAIF)

41.7

8.5

BMW

22.4

10

Audi

15.1

1.9

Hyundai (OTC:HYMLF)

13.7

3.9

Fiat (FIATY.PK)

59.4

2.4

Average

7.1

Auto parts retailers

One year return (%)

EV/EBITDA

AutoZone (NYSE:AZO)

10.4

9.9

O'Reilly Automotive (NASDAQ:ORLY)

18.9

11.4

Advance Auto Parts (NYSE:AAP)

29.6

7.5

Pep Boys (NYSE:PBY)

9

8

Average

9.2

Second, investors preoccupied/obsessed with large cap story stocks such as Tesla (NASDAQ:TSLA) and ignore microcap stocks like ABTL with strong fundamentals and a low valuation. Tesla cannot afford to disappoint while ABTL has a considerable margin of safety. It is, and always will be, a stock pickers' market.

Third, ABTL trades at a discount (instead of a deserved premium) despite significantly lower capex requirements and a business model with less inherent risk. Auto dealers must finance large inventories and risk heavy discounting if consumer preferences change or economic conditions deteriorate. Auto manufacturers have one of the highest capex requirements of any industry and run the risk of "hit or miss" new model acceptance and again, negative economic conditions. Auto retailers must carry large amounts of inventory but benefit from an economic downturn (as consumer fix cars rather than buy new ones) so they are more of a defensive play, which explains the relatively muted stock performance.

Conclusion

Investors with a longer term time horizon and willingness to buy less "visible" stocks with strong fundamentals should be rewarded with superior risk-adjusted returns.

ABTL should trade at a minimum P/E multiple of 15x given the previously mentioned positive factors. The target price of $6.45 is ~54% above the current price.

As mentioned in a previous report, risk can be reduced by using a conservative stop loss as well as not buying entire position at once (e.g. buy 25% of total position and buy more if price action confirms thesis).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Autobytel: An Auto Recovery Play With Low Valuation, High Free Cash Flow And Growth