Nov 26, 2021

November 26, 2021 - Advertisement - - Advertisement - Now is probably not the time to snag a deal with all but the global chip crunch on a new car, but there are deals to be found in autos—it takes a little creativity. Stocks are a good example. One is CDK Global (ticker: CDK), which sells software and technology to auto dealers as well as retailers and manufacturers of trucks, heavy machinery, sports and recreational vehicles. - Advertisement - It is true that car buying has been disappointing in the last one year as demand for older vehicles and prices have increased as chip shortage halts the rollout of new vehicles. But about 80% of CDK’s revenue comes from subscriptions, shielding it from the ups and downs of the auto market. In other words, auto dealers will not abruptly stop using the software if there is a slowdown in production. Still, CDK has had a challenging year as well. According to data from FactSet, the shares are down 14% and trading at 14 times forward earnings. Given its niche market, the company does not have a publicly traded competitor. For comparison, however, Automated Data Processing (ADP), which spun off CDK in 2014, gained 34% and traded at 34 times forward earnings. But hopeful investors view the CDK as an inflection point. The company, based in the Chicago suburb of Hoffman Estates, is a top-10 holding at Centerstone Investors as of the close of the third quarter. In March, CDK completed the sale of its international unit to Francisco Partners for $1.45 billion, or approximately 15 times the division’s earnings before interest, taxes, depreciation and amortization. The proceeds of the sale went to pay off debt. Then in June, CDK announced the acquisition of Roadster, which provides software to allow customers to buy new or used cars online from start to finish. Customers who don’t want an online-only experience can complete part of the process digitally and the rest in person, at least eliminating some of the long waits and bargains that most car buyers are known for. “We believe franchise dealers will adopt Roadster and other CDK applications as many of them seek to offer an end-to-end omnichannel retail experience,” Zachary Dimmerman, CenterStone associate portfolio manager and research analyst, told Baron. Centerstone isn’t the only one paying attention to the CDK. In September, Wolfe Research listed the auto software provider as one of its “top ideas” for proactive intervention. Wolfe’s team said CDK meets the activist “sweet spot” given its stable business but cheap valuation. The CDK doesn’t get much analyst coverage. Three out of four analysts tracking the company buy it with an average price target of $60.50 per share — up 50% from recent trading levels. Analysts forecast earnings growth of 9% year-on-year for the fiscal year ending June 2022. Write to Carleton English at [email protected] ,