Copart (CPRT, Financial), the $7.13 billion Dallas-based auto and truck dealership company, reported 14.3% year-over-year growth to $1.07 billion and an impressive 73.9% jump in profits to $323.9 million in third-quarter 2017 (30% margin vs. 20% in the year-ago period).
In addition to a $50 million increase in operating expenses, the company recorded a $93.8 million lower income tax expense resulting in an added rise in profits for the three quarters.
Valuations
Copart is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 18 times vs. the industry median of 17.5 times, a price-book (P/B) ratio of 7.09 times vs. 1.69 times and a price-sales (P/S) ratio of 5.2 times vs. 0.86 times.
The company has not paid any dividends in the past decade.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 5 times and 24.8 times.
Total returns
Copart has outperformed the broader Standard & Poor's 500 index in the past decade including its returns so far this year with 14.84% (annualized) gains and 11.78% vs. the index’s 7% and 9.49% (Morningstar).
Copart
According to filings, Copart was incorporated in California in 1982 and became a public company in 1994.
Copart is a leading provider of online auctions and vehicle remarketing services in the U.S., Canada, the United Kingdom, the United Arab Emirates, Oman, Bahrain, Brazil, Ireland, Spain and India. The company also provides vehicle remarketing services in Germany.
Copart provides vehicle sellers with a full range of services to process and sell vehicles primarily over the internet through its Virtual Bidding Third Generation internet auction-style sales technology (VB3). According to Copart, the vehicle sellers consist primarily of insurance companies but also include banks and financial institutions, charities, car dealerships, municipalities, fleet operators and vehicle rental companies.
The company sells the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public.
The majority of the vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically salvageable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made.
Copart offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs, and maximize the ultimate sales price.
In the U.S., Canada, Brazil, the United Arab Emirates, Oman, Bahrain, Ireland, Spain and India, Copart sells vehicles primarily as an agent and derives revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services, such as towing and storage.
In the U.K., Copart operates both on a principal basis, purchasing the salvage vehicles outright from the insurance companies and reselling the vehicles for the company’s own account, and as an agent.
In Germany and Spain, Copart also derives its revenue from sales listing fees for listing vehicles on behalf of many insurance companies.
Copart converted all of its U.S. and Canada sales to VB2 during fiscal 2004 and U.K. sales to VB2 during fiscal 2008.
VB2 (Virtual Bidding) opened Copart sales process to registered buyers (to whom the company refers as "members") anywhere in the world with access to the internet (1).
Copart has two (regional) segments: U.S. and International regions.
U.S.
Revenue in Copart’s U.S. division grew impressively by 17.5% year over year in the past nine months to $879.1 million (82% of total sales) and registered a profit margin of 33% compared to 21% in the year-prior period.
Service revenues generated 87% of the total $879.1 million sales for the period. According to filings, the growth in the U.S. was driven primarily by increased volume and a marginal increase in revenue per car due to higher average auction selling prices, which Copart believed was due to higher commodity price.
International regions
Revenue in international operations grew 1.3% year over year in the past nine months to $190.3 million (18% of total sales) and generated a margin of 17% vs. 16% in the same period last year.
According to Copart, the segment experienced a $14.1 million service revenue deduction secondary to foreign currency exchange rates. Nonetheless, international operations still experienced increased volume year over year.
Sales and profits
In the past three years, Copart recorded average revenue growth of 6.63%, profit growth average of 14.5% and profit margin average of 18.6% (Morningstar).
Cash, debt and book value
As of April, Copart had $189.6 million in cash and cash equivalents and $566.9 million in debt with a debt-equity ratio of 0.56 times vs. 0.98 times in the prior-year quarter. Overall shareholder equity has increased $289.8 million while overall debt fell by $133.97 million resulting in less leveraged balance sheet.
As part of shareholder equity, retained earnings rose by $268.9 million while paid-in capital rose by $51.4 million. Copart has added about 120.9 million in shares outstanding year over year.
Of Copart’s $1.81 billion assets 14.7%Â were goodwill and intangible assets while book value has grown an impressive 40.4% year over year to $1 billion.
Cash flow
In the recent three quarters, Copart’s cash flow from operation increased by 67% to $347.8 million. In addition to higher profits compared to last year, the company recorded higher cash flow in relation to its deferred income taxes, inventories and prepaid expenses and other current assets.
Capital expenditures were $124.7 million leaving Copart with $223.1 million in free cash flow vs. $64.5 million in the prior year period. Nonetheless, no share buybacks took place in those nine months. The company instead allocated $134.6 million in payments for employee stock-based tax withholdings.
On average, Copart allocated 139% of its free cash flow in share buybacks. In review, the company spent $8.3 million in fiscal 2015 having repurchased 231,500 of its shares at an average price of $36.02. In fiscal 2016, Copart spent $117.9 million in repurchases 2.9 million of its shares at an average price of $40.13.
In the three quarters, Copart also allocated $73 million in loan facility repayments, net of proceeds.
Conclusion
Absent any significant tax expenses reduction, Copart would still demonstrate healthy profitability year over year as of its recent operations. The company does seem to exhibit steady and sustainable worldwide operations regardless of foreign currency fluctuations thus probably explaining why the market has rewarded the company handsomely for years.
Copart also has maintained an acceptable 0.56 D/E ratio, leveraged and growing balance sheet. The company also seemed overly generous to its shareholders in terms of free cash flow payouts in recent years, except in the recent nine months when it prioritized its employees’ tax withholdings for its cash flow allocation.
Seven analysts have an average price target of $32 per share vs. $30.97 (at the time of writing). Applying three-year sales growth and P/S multiple averages followed by a 10% margin indicated a value of $23.6 per share.
In summary, Copart is a hold with $31 value per share.
Notes
(1) Company filing
This technology (VB) and model employs a two-step bidding process. The first step is an open preliminary bidding feature that allows a member to enter bids either at a bidding station at the storage facility or over the internet during the preview period. To improve the effectiveness of bidding, the VB2 system lets members see the current high bids on the vehicles they want to purchase. The preliminary bidding step is an open bid format similar to eBay®. Members enter the maximum price they are willing to pay for a vehicle and VB2’s BID4Ufeature will incrementally bid on the vehicle on their behalf during all phases of the auction. Preliminary bidding ends at a specified time prior to the start of a second bidding step, an internet-only virtual auction. This second step allows bidders the opportunity to bid against each other and the high preliminary bidder. The bidders enter bids via the internet in real time while BID4U submits bids for the high preliminary bidder up to its maximum bid. When bidding stops, a countdown is initiated. If no bids are received during the countdown, the vehicle sells to the highest bidder.
Disclosure: I do not have shares in the company mentioned.
