"It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price." -Warren Buffett (Trades, Portfolio)
GuruFocus has quantified those words of the legendary investor and created a screener that will find wonderful companies at fair prices.
The latest company to regain a spot on the Buffett-Munger Screener list (named for Buffett and his colleague Charlie Munger (Trades, Portfolio)) is Copart Inc (CPRT, Financial). That means the company has met the four criteria for a quality company at a reasonable price:
- It has a high predictability rank of 4.5 out of five stars (the screener requires a rank of at least four).
- It has one or more competitive advantages or moats.
- It has not taken on too much debt while growing its business.
- It is fairly valued or undervalued based on the PEPG or PEG ratio.
We will explore each of these criteria in more detail below.
About Copart
In its 10-K for 2020, the company called itself “the leading provider of online auctions and vehicle remarketing services with operations in the United States ('U.S.'), Canada, the United Kingdom ('U.K.'), Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates ('U.A.E.'), Oman, Bahrain, and Spain.”
It goes on to say:
“...upon our receipt of an existing vehicle, we help decrease its total environmental impact by extending its useful life and thereby avoiding the carbon emissions associated with the alternative of new vehicle and auto parts manufacturing. For example, many of the cars we process and remarket are subsequently restored to drivable condition, reducing the new vehicle manufacturing burden the world would otherwise face. Many of our cars are purchased by dismantlers, who recycle and refurbish parts for vehicle repairs, again.”
As I noted in June 2020, Copart could be considered an ESG (environmental, social and corporate governance) company because of how it connects insurance and other companies trying to dispose of damaged vehicles with dismantlers, recyclers and resellers.
At that time, I also asked if it could be a value stock, since it is a Buffett-Munger stock. That will be one of the issues we examine as we review Copart’s fundamentals.
Note that I have used the word "return" in the headline, though it is currently listed as a "new" entry. It had been on the Buffett-Munger list in June 2020, but apparently was off it for some time before returning to it recently.
Competition
Copart reported in its 10-K that it faced competition from other remarketers of both salvage and non-salvage vehicles. More specifically, competition comes from vehicle auctions, sales companies and vehicle dismantlers.
Nationally, its most significant competition comes from Insurance Auto Auctions (IAA, Financial), which had been spun off from KAR Auction Services (KAR, Financial) and ADESA Inc., a subsidiary of KAR.
On the dismantling side of the business, its biggest competitors are LKQ Corp. (LKQ, Financial) and trade groups, including the American Recycling Association and the United Recyclers Group.
The following two-year chart compares the performance of Copart, Insurance Auto Auctions and LKQ over the past two years:
That outperformance, backed up by its return on invested capital, return on equity and return on assets, make a case for the company enjoying one or more competitive advantages or what Buffett would call "moats."
Financial strength
With good cash-to-debt ratios, Copart enjoys a high financial strength ranking. The following chart shows how the company has grown its cash and reduced its debt in recent years:
The cash and debt ratios are backed up the Piotroski F-Score and Altman Z-Score. The first indicates the company is well managed, while the second shows it is on firm financial footing.
Finally, the company’s return on invested capital is more than three times its weighted average cost of capital. With ROIC at 30.38% and WACC at 8.13%, we see the company’s capital has been well allocated.
Profitability
Again, a very high score, made possible in part by the strength—and growth—of its margins, as shown in this chart:
As the green bars suggest, return on equity and return on assets are both leaders in the business services industry. Copart’s ROE is better than the 93.32% of its peers and competitors, while its ROA outpaces 97.82% of the 1,054 companies in the industry.
The growth numbers for revenue, Ebitda and earnings per share are also solid and have been growing steadily:
Dividends and share buybacks
Copart does not pay a dividend, but has rewarded shareholders by repurchasing shares, though the pace has slowed since earlier in the decade:
Valuation
As the following chart shows, the share price has grown quickly over the past several years:
Does that mean Copart is significantly overvalued, as the GF Value Line suggests?
As noted above, Buffett-Munger stocks are valued using the PEG ratio (price-earnings divided by the five-year Ebitda growth rate). In this case, that means dividing the price-earnings ratio of 39.68 by the Ebitda average annual growth rate of 20.70% per year.
The result is a PEG ratio of 1.92, nearly double what’s considered the fair value mark of 1. That’s obviously enough to make the grade for the Buffett-Munger Screener, but should it be enough for prudent investors?
To answer that, look to the warning signs posted by the GuruFocus system. It lists the stock as being close to 10-year highs for the price-book and price-sales ratios as well as the share price itself.
Finally, because the company has earned a high predictability score, its earnings-based discounted cash flow can be viewed with some confidence. It finds the stock to be slightly undervalued:
Considering all these elements, I believe a prudent investor would consider Copart’s current share price fair.
Gurus
Among the investing giants, there have been both bullish and bearish quarters over the past two years:
At the end of March, the first calendar quarter, seven gurus had positions in Copart. The top three stakes were those of:
- Pioneer Investments (Trades, Portfolio) with 2,180,814 shares, after increasing its holding by 20% during the quarter. That gave it a 0.92% stake in Copart and represented 0.18% of its funds’ assets.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management increased his holding by 92.52% to finish the quarter with 1,039,618 shares.
- Jim Simons (Trades, Portfolio)' Renaissance Technologies wound up March with 427,900 shares; it traded in and out of the company during the quarter.
Conclusion
Most of the fundamentals covering Copart suggest this is a fast-growing, well-managed company that should be able to keep rewarding shareholders in the coming years. It fits the bill as an ESG stock, but the fit is less comfortable if we call it a value stock.
While the cash and debt metrics are reassuring, many value investors might be put off by the fact it does have debt and a fair amount of it. Profitability is good across the board. Whether it has a margin of safety will depend on the weight individual investors give to the valuation measures shown.
Since we have to debate its valuation, value investors will likely want to look elsewhere for stocks that have a more pronounced tilt to the side of safety. Growth investors will want to give Copart a closer look since the company seems destined to keep improving its key measures in the coming years. Income investors will need to look elsewhere because there is no dividend.
