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.