Until recently, the share price of Copart Inc. (CPRT, Financial) was rising faster than an auctioneer’s patter. But that stopped abruptly in late November when the price pulled back.
Copart has taken a leading role in transforming the auto salvage business from local scrap yards into an online phenomenon that takes bids from around the world.
Much of its business comes from insurance and other companies that need to dispose of cars and trucks beyond repair. On the other side of the transactions are professional vehicle dismantlers as well as people and repair shops looking for parts.
Copart brings the two sides together, replacing local, live auctioneers with virtual bidding, along the lines of what’s done on eBay (EBAY, Financial). Both sellers and buyers like the arrangement, and that’s allowed the company to grow and be involved in consolidating what has been a mom-and-pop industry.
From an investor’s perspective, this stock has a GuruFocus 5-Star Predictability rating (as good as it gets) and has a place, at least temporarily, on the Buffett-Munger Screener list. To get on that list, a company must have:
- A high predictability rank, meaning it has consistently grown its revenue and earnings.
- A moat of some kind, so it is able to maintain its margins and revenues.
- Not taken on too much debt to grow the business.
- A PEPG (price-earnings [P/E] ratio divided by average growth over the past five years) ratio that is fair- or undervalued.
Should investors put Copart on their shortlists now that it's on the list?
Copart’s business
As noted, Copart saw an opportunity to consolidate a mom-and-pop industry, using technology. Think of it, loosely, as eBay for salvaged cars and trucks (unless otherwise noted, all information comes from Copart’s 10-K for 2016).
Rather than have live auctions at individual salvage yards, the company brings sellers and buyers together online through virtual bidding. By structuring its operations this way, auctions get more bidders than they would in a local yard, thus increasing competition and pushing up prices.
Sellers, who are Copart’s customers, like higher prices, of course, and Copart usually gets a percentage of the selling price so it benefits as well. Most of those sellers are insurance companies, disposing of cars that have been damaged in accidents or otherwise end up in their possession. The company says other sellers/customers include banks and financial institutions, charities, car dealerships, municipalities, fleet operators and vehicle rental companies.
The buyers, who must become members of Copart’s operation, are “licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public.”
The company has three business models:
- Selling as agent and earning income from fees paid by sellers and buyers. This model is used in the U.S., Canada, Brazil, the United Arab Emirates, Oman, Bahrain, Ireland, Spain and India.
- In the United Kingdom, it also operates on a principal basis, which means buying the vehicles outright from sellers and then reselling them, earning the difference between the price paid and the price received.
- Germany and Spain also produce revenue from sales listing fees, for vehicles listed by insurance companies.
In an April 2016 Informational Supplement, Copart outlined the main drivers of its business:
Revenue
Copart earned roughly $1.25 billion in fiscal 2016 revenue as shown in this excerpt from the 10-K:
Elsewhere, it notes that 87% of revenues came from services and 13% from sales revenues.
In this excerpt, it shows the domestic vs. international breakout of revenues:
This GuruFocus chart shows how revenue has climbed over the past decade:
Competitors
In its 10-K, the company reports significant competition from local, regional and national companies that remarket (auction) both salvage and non-salvage vehicles.
Domestically, it says the biggest of these are “KAR Auction Services Inc. (formerly ADESA Inc. and Insurance Auto Auctions Inc.) (KAR, Financial); Auction Broadcasting Co. LLC; and Manheim Inc. The largest national dismantler is LKQ Corp. (LKQ, Financial).”
It notes that the latter, along with trade groups such as the American Recycling Association and the United Recyclers Group LLC sometimes buy directly from insurance companies, bypassing the remarketing companies.
Internationally, it says its main competitors are privately held, independent remarketers.
Hoover’s lists its three top competitors as LKQ, Cox Automotive Inc. and KAR Auction Services.
Moat
An excerpt from the [Chuck] Royce Heritage Fund Semiannual Letter, published on GuruFocus, Sept. 9, 2016, says, “Copart has what we see as a strong niche providing vehicle suppliers, primarily insurance companies, with services to process and sell salvage vehicles through auctions. It has benefited from favorable industry tailwinds including aging vehicle fleets and the increased cost and complexity of car repairs due to the greater number of computerized parts, which has created higher salvage volumes."
Morningstar provides a wide moat rating.
The company says, in its Informational Supplement, that would-be competitors face a number of challenges:
Growth
Over the past three years, Copart has posted solid growth numbers in several key metrics:
- Revenue growth: 8.8%.
- EBITDAĂ‚ (earnings before interest, taxes, depreciation and amortization)Ă‚ growth: 13.2%.
- EPS growth: 16.7%.
Its operating and net margins have also grown; this chart shows operating margin:
Looking ahead, this excerpt from the company’s Informational Supplement shows some of the specifics of its growth strategy:
More broadly, it says wants to:
- Buy and develop new salvage facilities in key markets.
- Negotiate national and regional vehicle supply agreements.
- Expand its service offerings.
- Develop and expand public auction facilities.
Other
Copart is headquartered in Dallas.
Its 2016 fiscal year ended on July 31.
Chairman of the board: Willis J. Johnson, age 69, is the founder of the company and has held this position since 2010.
CEO and Director: A. Jayson Adair, age 46, has also held his position since 2010. He began his career at Copart as manager of operations in 1989.
Chief Financial Officer and Senior Vice President: Jeffrey Liaw, age 39, took on the CFO position in 2016. Officer information from Reuters.com.
Copart ownership
Among the investment gurus followed by GuruFocus, Chuck Royce (Trades, Portfolio) has the largest holding of Copart, 2,375,972 shares, representing just over 2% of the company’s outstanding shares. Jim Simons (Trades, Portfolio) and Columbia Wanger (Trades, Portfolio) are the second and third largest holders among the gurus.
For a mid-cap stock, Copart enjoys a large proportion of institutional ownership (including pension, mutual and hedge funds):
Insiders own 8.2% of the company; this excerpt from an insider holdings table shows founder Willis Johnson still holds a large share of the company:
Shorts hold a not-insignificant number of shares, at more than 5%.
Copart by the numbers
Financial strength
Copart earns a medium rating for financial strength and a good rating for profitability and growth:
The company is a relative newcomer to debt financing, at least long-term debt:
Revenue has grown along with the debt:
This is the shape of EBITDA over the past 10 years:
In a far bumpier way, free cash flow has also gone up:
With an operating margin above 30% and expanding, the company should be well placed to generate cash flow.
Valuations
The company has earned a GuruFocus 5-Star Predictability rating, based on the consistent growth of its earnings over the past five years. That makes it a good candidate to generate higher share prices as earnings pull the prices up.
A less optimistic view comes from the DCF Fair Value Calculator which doesn’t see much upside for the share price:
Copart’s P/E ratio sits in the mid-teens; that’s low in the context of its history and its forward P/E (22.62).
The analysts followed by NASDAQ.com don’t see much promise. They have a consensus 52-week price target of $58.50, just a couple of dollars above the current price. Most analysts aren’t recommending a buy (or a sell):
On the positive side again, this chart shows the growth of EPS with an estimate that looks ahead a couple of years:
Conclusion
Will the share price go up? That will depend on each individual investor’s view of the evidence, pro and con.
As for buying, though, Copart is not for the shortlists of investors who approach the market cautiously. Although the company’s debt is not enough to keep it off the Buffett-Munger list, it does have debt, nonetheless. They might also wonder if the current ROE of more than 50% is sustainable.
Value investors will likely pass on this name as well; while the stock price is depressed, it has not pulled back enough to be an obvious bargain. With no dividend, this is not for income investors.
The stock will find a better fit with growth-oriented investors who might see the current dip as an opportunity at a fair- or slightly undervalued price.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
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