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In this post, I present my thoughts on why I think Copart (CPRT) offers attractive return potential with low risk.
Based on my analysis I have initiated a position in an account for which I do not disclose details.
Copart - Business Overview
This Dallas-based firm dominates the market for processing and reselling salvage cars that are vehicles that are sufficiently damaged to be written off as a total loss by auto insurers as well as discarded cars still in decent condition.
CPRT was founded in 1982, went public in 1994, and launched its website in 1996. It became the first online auto auction with a completely online model in 2003. It is now a leading provider of online auctions and vehicle remarketing services with operations in the US, Canada, the UK, Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates, Oman, Bahrain, and Spain.
With operations in 200+ locations, it sells over 3 million vehicles per year and attracts buyers from over 190 countries.
CPRT has grown its annual revenue growth from ~$0.114B in FY1998 to ~$2.7B in FY2021. Most recently it reported revenue of ~$0.81B in Q1 2022 (CPRT's FYE is July 31).
The company is consistently profitable. Net income has grown from ~$15.216 million in FY1998 to ~$0.937B in FY2021.
In addition, the company generates strong Free Cash Flow (FCF). In FY2021 is generated ~$0.525B and in Q1 2022 it generated ~$0.25B.
Quite often, companies that grow to the degree to which CPRT has grown rely on debt. CPRT is at the other extreme. At the end of Q1 2022, CPRT had cash, cash equivalents, and restricted cash of ~$1.3B versus TOTAL LIABILITIES of ~$1.125B.
In FY2021, sales of U.S. vehicles, on a unit basis, to members registered outside the state where the vehicle was located accounted for 64.1% of total vehicles sold. Of these vehicles, 29.7% were sold to out-of-state members within the U.S. and 34.4% were sold to International members. The company derived this information based on the IP address utilized during the auction process.
Estimates are that ~1 in 5 cars today are totalled after an accident due to their expensive new technology. This is an increase from ~1 in 10 in the late 80s. Some analysts expect this ratio to increase to ~50% as more advanced cars replace older models.
In addition, analysts estimate that ~6 in 10 cars sold at CPRT yards go to dismantlers; ~30% get resold as used cars.
I highly recommend investors learn more by reviewing the CPRT's website and reading Part 1 in the FY2021 10-K. These information sources provide a good overview of the company and its operating and growth strategy. The 10-K also includes a high-level overview of the competitive landscape and how CPRT sets itself apart from its competitors.
Furthermore, there are multiple YouTube videos from which we can learn about 'member' experiences (see Copart Buying Cars).
Liquidity and Capital Resources
CPRT's business is seasonal. Inclement weather during the winter months increases the frequency of accidents and consequently, the number of cars involved in accidents which the insurance companies salvage rather than repair.
During the winter months, most of CPRT's facilities process 5% - 20% more vehicles than at other times of the year. Severe weather events, including but not limited to tornadoes, hurricanes, and hailstorms, can also impact volumes. These increased volumes require the increased use of cash to pay out advances and handling costs of the additional business.
Management repeatedly states in its financial statements that it believes currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy operating and working capital requirements for the foreseeable future.
CPRT can be expected to acquire or develop additional locations and expand some of its current facilities in the foreseeable future. This may require additional cash through drawdowns on the $1.05B Revolving Credit Facility or the issuance of additional equity to fund this expansion.
The timing and magnitude of growth through expansion and acquisitions are not predictable and the opening of new greenfield yards is contingent upon various factors.
The costs to develop a new yard can range from $3.0 - $50.0 million, depending on size, location and developmental infrastructure requirements.
At the end of Q1 2022, $191.2 million of the ~$1.3B of cash, cash equivalents, and restricted cash was held by CPRT's foreign subsidiaries. Were these funds to be needed for its US operations, the repatriation of these funds could be subject to the foreign withholding tax following the U.S. Tax Reform. CPRT's intent, however, is to permanently reinvest these funds outside of the US; the current plans do not require repatriation to fund CPRT's US operations.
Note Purchase Agreement
The ~$0.409B 'Long-term debt and other liabilities, net of discount' line item on the Q1 2022 Balance Sheet is the Note Purchase Agreement into which CPRT entered on December 3, 2014.
These senior secured notes consist of 4 $0.1B tranches:
- 4.07% Senior Notes, Series A, due December 3, 2024;
- 4.19% Senior Notes, Series B, due December 3, 2026;
- 4.25% Senior Notes, Series C, due December 3, 2027; and
- 4.35% Senior Notes, Series D, due December 3, 2029.
CPRT complies with all covenants related to the Note Purchase Agreement as of the end of Q1 2022.
CPRT generates ample FCF. I envision there will be no problem in repaying the amounts under the terms and conditions reflected in the loan agreement.
Main Competitors
Insurance Auto Auctions, Inc. (IAA), one of CPRT's key competitors, entered the vehicle salvage business in 1982 and first became a public company in 1991. After growing through a series of acquisitions, IAA was acquired by two private equity firms in 2005. The two private equity firms and certain members of IAA management contributed IAA to KAR Auction Services, Inc. (KAR) in 2007.
On February 27, 2018, KAR announced a plan to pursue the separation and spin-off of IAA (its salvage auction services business) into a separate public company. On the June 28, 2019 separation date, KAR completed the distribution of 100% of the issued and outstanding shares of common stock of IAA to the holders of record of KAR's common stock on June 18, 2019, on a pro-rata basis.
Both IAA and KAR are publicly traded companies. They are MUCH smaller than CPRT. My comparison of the historical performance of all 3 companies and a review of their financial statements leads me to conclude that IAA and KAR are inappropriate investments for me.
IAA's debt is non-investment grade. Moody's and S&P Global rate this company's unsecured domestic long-term debt Ba3 and BB-. These ratings are the bottom tier of the non-investment grade speculative category. These ratings define IAA as being less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to IAA's inadequate capacity to meet its financial commitments.
KAR's financial risk is even greater than that of IAA! Moody's and S&P Global rate this company's unsecured domestic long-term debt B2 and B. These ratings are the middle tier of the highly speculative category. These ratings define KAR as currently having the capacity to meet its financial commitments. Adverse business, financial, or economic conditions, however, will likely impair KAR's capacity or willingness to meet its financial commitments.
Copart - Financials
Q1 2022 Results Versus Historical Results
I have provided a link to CPRT's FY2021 10-K earlier in this post. The Q1 2022 10-Q can be accessed here.
CPRT's Net Income (in millions) in Q1 was 260. By way of comparison, CPRT generated Net Income in FY2012 - FY2021 of 182, 180, 179, 220, 270, 394, 418, 592, 700, and 936.
Diluted EPS has also exhibited a positive trend with FY2012 - FY2021 results of $0.70, $0.70, $0.68, $0.84, $1.11, $1.66, $1.73, $2.46, $2.93, and $3.90. In Q1 2021, CPRT reported $1.08.
In Q1 it reported an Operating Margin of ~40.75%. This compares favourably with its FY2012 - FY2021 Operating Margin (in %) of 31.93, 27.04, 26.13, 30.05, 32.04, 33.2, 32.42, 35.09, 37.0, and 42.21.
CPRT's FY2012 - FY2021 and Q1 2022 Operating Cash Flow (in millions of $) is 230, 199, 263, 265, 332, 492, 535, 647, 918, 991, and 313.
Back out CAPEX (in millions of $) of 55, 130, 82, 79, 174, 172, 288, 374, 592, 463, and 65 during the same timeframe and we get FCF (in millions of $) of 175, 69, 181, 186, 159, 320, 247, 273, 326, 528, and 248.
Copart - Credit Ratings
No rating agency rates CPRT since CPRT has no 'net debt'.
Dividend and Dividend Yield
CPRT does not distribute a dividend.
On September 22, 2011, CPRT's Board of Directors approved an 80 million share increase in the stock repurchase program, bringing the total current authorization to 196 million shares.
For FY2020 and FY2021, CPRT did not repurchase any shares of its common stock under the program. For FY2019, CPRT repurchased 7,635,596 shares of its common stock under the program at a weighted average price of $47.81/share totalling $0.365B.
It did not repurchase any shares of its common stock under the program during Q1 2020 or 2021.
As of October 31, 2021 (end of Q1 2022), the total number of shares repurchased under the program was 114,549,198, and 81,450,802 shares were available for repurchase under the program.
In FY2012 - FY2021 and Q1 2022, CPRT's weighted average number of outstanding shares (in millions of shares) was 263, 260, 262, 263, 244, 237, 242, 240, 239, 240 and 241.
Copart - Valuation
CPRT's FY2012 - FY2021 PE ratios are: 20.49, 27.15, 25.34, 22.49, 17.26, 33.74, 25.41, 31.36, 44.65, and 36.53.
In FY2019 - FY2021, CPRT generated $2.46, $2.93, and $3.90 in diluted net EPS. In Q1 2022, CPRT generated $1.08 of diluted net EPS versus $0.83 in Q1 2021. It generated $0.81, $1.19, and $1.06 in Q2 - Q4 2021.
CPRT would have to generate $0.94/quarter in each of the next 3 quarters to generate the $3.90 it generated in FY2021.
I think it can conservatively generate at least $1.00 in diluted net EPS in each of the remaining 3 quarters in FY2022 thus resulting in diluted net EPS of $4.08 for FY2022. Shares are currently trading at ~$136.50 thus giving us an estimated forward diluted PE of ~33.5
The two online trading platforms I use reflect the following adjusted diluted EPS estimates:
- FY2022 - 10 brokers - mean of $4.31 and low/high of $4.02 - $4.56. Using the current ~$136.50 share price and the mean estimate, the forward adjusted diluted PE is ~31.2.
- FY2023 - 10 brokers - mean of $4.62 and low/high of $4.23 - $5.00. Using the current ~$136.50 share price and the mean estimate, the forward adjusted diluted PE is ~29.5.
These valuations are slightly higher than what I would like. CPRT, however, is in growth mode, has no debt, and is the industry leader. I am, therefore, willing to pay up to acquire shares in this company.
Copart - Final Thoughts
Some have a tolerance for higher risk as evidenced by investor behaviour over the past couple of years; new trading platforms have provided 'investors' with the means with which to gamble from the comfort of home.
Investing in high-quality companies strikes me as a far better way to generate wealth than speculating in less than stellar companies. In addition, a long-term buy and hold strategy is far less time-consuming; monitoring second by second price fluctuations strikes me as insane.
Based on my analysis, CPRT fits my conservative investor profile; I will not have to worry about learning that CPRT has filed for creditor protection.
I have initiated a position in an account for a young investor I am helping create a portfolio to achieve financial freedom and do not disclose details of such trades. In the coming days, I intend to acquire additional CPRT shares for an account in the FFJ Portfolio and in other accounts for which I do not disclose details.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long CPRT.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
