Copart: A market leader in an overlooked industry.
Opdateret: 7. aug.
I first got to know Copart through Christopher Mayer who wrote the book "100 baggers - stocks that return 100-to-1 and how to find them", as it is a stock that he owns. It is always interesting to investigate stocks that investors such as Christopher Mayer owns. When investigating Copart I realized that it is a market leader in an overlooked industry, which is usually a great thing for investors. The question is if now is the time to buy the stock?
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly describe the company and if it has a moat. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Copart. If you would like to copy my portfolio or see the stock in my portfolio, you can read about how to do so here. I don't own shares in any of their competitors either.
Copart was funded in 1982 in California, United States by Willis Johnson who served as CEO until 2010 and now serves as Chairman of the Board. Copart is a global provider of online vehicle auctions with operations in United States, Canada, United Kingdom, Brazil, Ireland, Germany, Finland, United Arab Emirates, Oman, Bahrain, and Spain. Copart specializes in selling damaged cars that can be repaired or that can be scrapped with the buyer can sell the parts. To describe the business in a simple way: A car suffers a damage in an accident the owner of the car gives the car to an insurance company. The insurance company has no use for a damaged car, so they sell it through Copart, which earns their revenue through fees and a percentage of the sales. In some cases, Copart buys the car and sell it through their platform and gets all of the proceeds themselves. While Copart has operations in 11 countries, the buyers can be all over the world. Copart has 43 % of the market share, while their largest competitor is IAA with a 40 % market share, making the industry a duopoly. Copart has 35 contracts with large insurance companies, and these contracts usually lasts between 5 to 7 years. Being a market leader in with 43 % shows that Copart has brand moat, as its customers, whether it is the sellers, or the buyers trust Copart.
On the contrary to most other companies, Copart now has two co-CEOs in Jay Adair and Jeff Liaw. Jay Adair has been the CEO since 2010 when he took over for Willis Johnson. He joined Copart in 1989 when he was 19 years old and held various positions in the company prior to becoming the CEO. Jay Adair is credited for being the reason for Copart's move into online auctions, which has given them a competitive advantage over IAA. During Jay Adair's leadership the share of Copart has appreciated approximately 1.100 %, so he has certainly done a great job for shareholders. It is also interesting that Jay Adair's compensation for being the CEO of Copart is $1 a year salary, $0 annual bonus and 3,5 % ownership of Copart. Jeff Liaw joined Copart as CFO in 2016 and became the co-CEO in 2022. He has a bachelor's degree in Finance and Business Administration from the University of Texas and an MBA from Harvard Business School. It is hard to judge Jeff Liaw as he has been the CEO for less than 1 year. Personally, I believe that Jay Adair will mentor Jeff Liaw until Jeff Liaw is ready to be the sole CEO of Copart, much like Jay Adair himself was mentored by Willis Johnson. I believe it is a good way to do things, and means that I'm comfortable with management, also if Jeff Liaw becomes the sole CEO at some point.
I believe that Copart has a brand moat. I really like the management as well as Jay Adair has delivered tremendous results and will mentor Jeff Liaw. Now let us investigate the numbers to see if Copart lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I will investigate is the return on investment capital, also known as ROIC. Ideally, you would like to see a ROIC above 10 % in all years. Copart has delivered a ROIC above 10 % each year in the last 10 years. It is even more encouraging that Copart has managed to deliver a ROIC above 20 % each year since 2017. The ROIC shows that Copart is a great company that is continuously delivering a high ROIC, something that I really like to see as an investor.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Once again Copart impress with their numbers. Since 2017 Copart has grown their equity with a high rate each year. I'm impressed to see numbers like these.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Not surprisingly, Copart has delivered a positive free cash flow each year in the last 10 years. Leveraged free cash flow has constantly been high, which is another positive sign. However, the relatively low free cash flow yield indicates that Copart may not be cheap at these level but we will look into that later in the analysis.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years by calculation long-term debt to earnings. Doing the calculation on Copart, I can see that Copart has no debt. I like companies with no debt. Hence, Copart continues to impress me based on the numbers.
Like every other investment there are risks when investing in Copart. One risk is related to macroeconomics. In the latest earnings call, management mentioned that their costs have seen pressures from inflation, primarily related to labor and fuel. If inflation keeps running high, it will result in significant costs for Copart as they mention in their annual report that operating personal (approximately 9.500 employees) is one of their primary costs. Furthermore, higher fuel prices will also boost costs as Copart will still need to tow cars to their sites. Furthermore, used vehicle prices are higher than usually as prices has increased by 14 % CAGR the last 3 years, compared to 1,9 % CAGR historically. The prices in the salvage market are correlated with the prices of used cars. Losing customers. In their annual report, Copart mentions that although no single customer accounted for more than 10 % of the revenue in their last three fiscal years, a limited number of vehicle sellers have historically accounted for a substantial part of their revenue. As I wrote previously, Copart has 35 contracts with insurance companies, and if one or more decides not to renew their contract and decide to go with a competitor, it will hurt the results of Copart. Cars are getting safer. Copart's business mode is to sell damaged cars, and as cars are getting safer they may have less products to sell, and less products mean less fees, which means less revenue. Cars are getting safer by using different materials, and who knows where autonomous driving will be in years for now, and if it will result in less accidents.
There are also a lot of potential for Copart moving forward. One is technology and automation. Operational personal costs is one of the major costs for Copart. In their latest earnings call, management mentioned that they are constantly seeking ways to optimize their operational processes through technology and automation. If Copart manages to find ways to cut costs due to automation and technology it will lead to higher operating margins, which again will lead to higher profits. According to co-CEO Jeff Liaw, their tech teams are constantly studying the space to find technology that could benefit the business. Repairs are getting more expensive. Labor costs are also increasing for car repairs, which will need to forward the costs to the customers. Furthermore, cars are getting more complex as it has more components than previously, and it will probably increase as the world is switching into electric vehicles. Hence, repairing cars will get more expensive, which could results in insurance companies choosing to sell the cars rather than getting them repaired, which would be good for Copart. Blu Car continues to grow. In the analysis, I have focused on insurance companies, as they are Copart's largest customers. However, Copart is also cooperating with companies in the no-insurance space, such as banks and rental car companies. This group is collectively called Blu Car. In their latest earnings call, management mentioned that in the first half of the fiscal 2023, the Blu Car segment has grown by 20 % year over year, which resulted in Copart outgrowing the overall wholesale vehicle auction industry. If Blu Car continues to grow at these levels, it could contribute to revenue significantly moving forward.
All right, we have gone through the numbers, potential and risk regarding Copart, and now it is time for us to calculate a price for Copart. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 2,26, which is the one from 2022. I chose an Estimated future EPS growth rate of 14 % (Finbox estimates 14,5 % growth), Estimated future PE 28 (which the double of the growth rate, as the historically PE for Copart has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $57,99, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Copart at price of $29,00 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 1.230. The Capital Expenditures was 438. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 306,6 in our further calculations. The Tax Provision was 253. We have 476,196 outstanding shares. Hence, the calculation will be like this: (1.230 - 306,6 + 253) / 476,196 x 10 = $24,70 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1,77 and a growth rate of 14 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $26,70.
Copart is a great company as it is a market leader in a sector that is pretty much a duopoly. I believe that Copart has a great management as well and will continue to have so as Jay Adair will mentor Jeff Liaw until he is ready to be the sole CEO. Copart will experience some short-term headwinds because of inflation, while the price of salvaged cars will probably drop as they are correlated with the prices of used cars. Long-term risks are a bit muddier; I believe that Copart will continue to execute meaning losing customers don't seem like a large risk. However, is is hard to predict if we will see a fundamental change in accident if autonomous driving will be widely used at some point. I still think the positives outweigh the negatives though, and Copart has shown that it has managed to deliver stunning results in the last ten years, and I believe they will continue to do so. Another thing that I didn't mention in the analysis is that Copart owns 90 % of the land they are using, and some of that land has appreciated greatly in price, which is an asset as well. I don't think you will manage to get a 50 % discount on Copart, and I will open a position if it ever falls to $50.
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