DealerTrack Technologies: Invest In Automobile Small Cap Niche Play

Shares of automobile finance specialist DealerTrack Technologies (NASDAQ:TRAK) shot up over 10% Wednesday thanks in large part to a third quarter earnings and revenue beat. The company, which offers the largest online credit application network, connects over 20,000 dealers with more than 1200 lenders. It appears investors are finally coming around to this small growing automobile niche play. With dominant market share, a series of acquisitions, and a new business approach, shares should continue to hit new highs.

DealerTrack reported record revenue in the third quarter with a total of $124.6 million. This came in $2.53 million ahead of where analysts thought. Earnings per share of $0.27 also beat analysts' projections by $0.02. Here is a look at revenue in the company's two business sectors:

 

Revenue

Growth

Organic Growth

Subscription

$45.2 mil

+27%

+12.5%

Transaction

$73.4 mil

+25%

+21.0%

Click to enlarge

Here is a look at the areas of focus under each business segment:

Transaction:

· Sales and F&I Solutions

· Registration and Titling Services

· Collateral Management Services

Subscription

· Dealer Management System

· Sales and F&I Solutions

· Inventory Solutions

· Interactive Solutions

· Digital Retailing

To understand how DealerTrack makes its money, here's a look at the car buying process and how the company profits:

· Dealer: Verify ID and Pull Credit Report ($0.05 to $1.00)

· Lender: Submit Credit Application ($1.50 to $5.00)

· Lender: Process Contract ($2.50 to $5.00)

· Dealer: Vehicle Registration ($2.00 to $10.00)

· Lender: Title & Lien Administration ($1.50 to $5.00)

As you can see, DealerTrack profits in several steps of the car buying process. With a series of acquisitions, the profit per vehicle could actually increase. In the third quarter, DealerTrack reported average revenue per car sold of $7.70. This was an increase of 19% from the prior year. On the subscription front, average monthly subscription fees were up to $758 from $694 the previous year.

Two recent acquisitions by DealerTrack should boost revenue and earnings going forward as the company integrates the services and cross-sells several items. In September, DelarTrack acquired VINtek for $53.4 million. VINtek brings with it a network of over 3000 banks and auto financing companies as customers. VINtek provides services like collateral management, lien and title, and consumer finance. The acquisition absolutely makes sense for DealerTrack as it combines several already offered services and broadens the company's network of customers.

Back in August, DealerTrack acquired Customer Focused Marketing. DealerTrack believes the acquisition will help its subscription services grow as it will have more items to offer customers. Customer Focused Marketing is expected to grow 35% annually. With a lead in the mobile platform market, Customer Focused Marketing saves DealerTrack the time and money to design its own product. The acquisition will help DealerTrack boost its mobile presence and integration of several services.

DealerTrack's acquisitions of both VINtek and Customer Focused Marketing closed on October 1st. The acquisitions are expected to add $5.5 million to the company's revenue line in the fourth quarter. Over the last nine months, the two units posted a combined revenue total of $11 million.

Over the last 11 years, DealerTrack has acquired over 20 companies and continues to maximize dollars per car sale. The company ended the third quarter with $164.5 million in cash. This figure did not include the $62.4 million that was paid to close the two deals on October 1st. That leaves DealerTrack with just over $100 million, which I believe they will put towards more acquisitions.

Other upcoming items for DealerTrack include:

· Piloting an expedited title product in the third quarter of 2013

· Launching DealerTrack 2.0 in first half of 2014

· Reorganization of sales teams. This is an important step needed to improve relationships with customers as many complained about multiple calls from DealerTrack employees. From the earnings call, "We began piloting the account management model in the first quarter of 2013, and the results have been very positive, with this new approach driving increased cross-selling and improving already healthy renewal rates."

During the earnings call, DealerTrack gave guidance for fiscal 2014. The company expects total revenue growth of 17% to 18% in 2014, with 4% of that coming from the two new acquisitions. Subscription revenue is expected to grow 20 to 22%, while transaction revenue is expected to grow 14 to 16%. DealerTrack will update guidance in February. Analysts on Yahoo Finance see revenue growing 13.2% in fiscal 2014 and earnings per share hitting $1.47.

Shares of DealerTrack are up 35% in 2013 and are trading just shy of five year highs seen just last month. Investors were impressed with third quarter earnings and sent shares up double digits on Wednesday. I believe any pullback will be a good buying opportunity for long term investors to get involved with this small cap stock. With growing revenue from both segments and several promising acquisitions and new offerings, revenue and earnings could shoot even higher over the next two years.

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.