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  • Glenn

Copart: A market leader in an overlooked industry.

Opdateret: for 1 dag siden

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." He mentioned that he owns this stock. It is always interesting to investigate stocks that investors like Christopher Mayer own. When investigating Copart, I realized that it is a market leader in an overlooked industry, which is usually a great advantage for investors. The question is, is now 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 any shares in Copart. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their competitors either. Thus, I have no personal stake in Copart. If you want to purchase shares (or fractional shares) of Copart, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.

Copart was founded 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 the United States, Canada, the United Kingdom, Brazil, Ireland, Germany, Finland, the United Arab Emirates, Oman, Bahrain, and Spain. Copart specializes in selling damaged cars that can be repaired or scrapped, allowing the buyer to sell the parts. To describe the business in a simple way: When a car is damaged 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 generates revenue through fees and a percentage of the sales. In some cases, Copart buys the car and sells it through their platform, keeping all of the proceeds for themselves. While Copart operates in 11 countries, its buyers can be located anywhere in the world. Copart holds 43% of the market share, while their main competitor, IAA, has a 40% market share, resulting in a duopoly within the industry. Copart has 35 contracts with large insurance companies, and these contracts usually last between 5 to 7 years. Being a market leader with 43% market share shows that Copart has a strong brand moat, as both sellers and buyers trust the company.

On the contrary, unlike most other companies, Copart now has two co-CEOs, Jay Adair and Jeff Liaw. Jay Adair has been the CEO since 2010 when he took over from Willis Johnson. He joined Copart in 1989 at the age of 19 and held various positions within the company before becoming the CEO. Jay Adair is credited with being the driving force behind Copart's transition to online auctions, which has provided them with a competitive edge 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 a $1 annual 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 difficult to assess Jeff Liaw as he has only been the CEO for a 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 appreciate the management, especially how Jay Adair has consistently achieved outstanding results and will serve as a mentor to Jeff Liaw. Now, let us investigate the numbers to determine if Copart meets our criteria for having 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 invested capital, also known as ROIC. Ideally, you would like to see a ROIC above 10 % in all years. Copart has delivered a return on invested capital (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. ROIC did decrease slightly in a challenging fiscal 2023 but still I'm not worried as it still managed to top 20%.The ROIC shows that Copart is a great company that is continuously delivering a high ROIC. Thus, the Return on Invested Capital (ROIC) suggests that Copart possesses a competitive advantage and is considered a compounder, which is a characteristic I appreciate in an investment.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Once again, Copart impresses with their numbers. Since 2017, Copart has experienced significant growth in their equity each year. I'm impressed to see numbers like these.

Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use margins to enhance clarity and improve understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Not surprisingly, Copart has consistently generated positive free cash flow for the past 10 years. Leveraged free cash flow has consistently been high, which is another positive sign. However, the relatively low free cash flow yield indicates that Copart may not be cheap at these levels, but we will look into that later in the analysis.

Another important aspect to investigate is a company's debt. We need to determine if the business has a manageable level of debt that can be repaid within a 3-year period. This can be assessed by calculating the long-term debt to earnings ratio. Doing the calculation on Copart, I can see that Copart has no debt. I prefer companies that have no debt. Hence, Copart continues to impress me based on its numbers.

Like every other investment, there are risks associated with investing in Copart. One risk is related to macroeconomics. Management has mentioned that their costs have seen pressures from inflation, primarily related to labor and fuel. If inflation continues to rise, it will lead to significant costs for Copart. They mention in their annual report that one of their primary expenses is the operation of personnel, which includes approximately 9.500 employees. 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,% CAGR historically. The prices in the salvage market are correlated with the prices of used cars, which means that prices may drop. Losing customers. In their annual report, Copart mentions that no single customer accounted for more than 10% of the revenue in their last three fiscal years. However, historically, a limited number of vehicle sellers have accounted for a substantial part of their revenue. In the past, vehicle sellers have terminated contracts with Copart. Copart has 35 contracts with insurance companies. If one or more of these companies decides not to renew their contract and instead chooses to go with a competitor, it will negatively impact Copart's results. Cars are becoming safer. Copart's business model is centered around selling damaged cars. However, as cars become safer, they may have fewer products to sell. This decrease in inventory would result in reduced fees and ultimately lead to a decline in revenue. Cars are becoming safer by utilizing various materials, and it is uncertain where autonomous driving will be in the years to come, and whether it will lead to a decrease in accidents.

There is also a lot of potential for Copart moving forward. One is technology and automation. Operational personnel costs are one of the major expenses for Copart. Management has mentioned that they are constantly seeking ways to optimize their operational processes through technology and automation. If Copart manages to find ways to reduce costs through automation and technology, it will result in increased operating margins, which in turn will lead to higher profits. According to co-CEO Jeff Liaw, their technology teams are constantly studying the industry to identify technologies that could benefit the business. Repairs are becoming 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 become more expensive, which could result in insurance companies opting to sell the cars instead of repairing them. This would be beneficial 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 collaborating with companies in the non-insurance sector, such as banks and rental car companies. The group is collectively called Blu Car. In fiscal year 2023, the Blu Car segment grew by 13,8% compared to the previous year, allowing Copart to outpace the overall wholesale vehicle auction industry. If Blu Car continues to grow at these levels, it could make a significant contribution to revenue in the future.

Now it is time to calculate the price of shares in Copart. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 1,28, which is from fiscal 2023. I have selected a projected future EPS growth rate of 10,7% (Finbox estimates EPS to grow by 10,7% as well). Additionally, I have chosen a projected future P/E ratio of 21,4, which is twice the growth rate. This decision is based on the fact that Copart has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $18,71. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Copart at a price of $9,36 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 1.364 and capital expenditures were 517. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 362 in our calculations. The tax provision was 317. We have 957,344 outstanding shares. Hence, the calculation will be as follows: (1.364 – 362 + 317) / 957,344 x 10 = $13,77 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Copart's Free Cash Flow Per Share at $0,89 and a growth rate of 10,7%, if you want to recoup your investment in 8 years, the Payback Time price is $11,56.

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 great management, and this will continue as Jay Adair mentors Jeff Liaw until he is ready to become the sole CEO. Copart may face short-term challenges due to inflation, which could result in a decrease in the price of salvaged cars since they are closely linked to 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 believe that the positives outweigh the negatives. Copart has consistently delivered impressive results over the past ten years, and I have confidence that they will continue to do so. Another aspect that I didn't mention in the analysis is that Copart owns 90% of the land they utilize, and a portion of that land has significantly appreciated in value, making it an additional asset. I don't think you will be able to get a 50% discount on Copart. However, if it reaches the intrinsic value of the Ten Cap price at $27,56, I will open a position in Copart.

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I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.

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