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This is not an environment in which to speculate. Instead, consider an investment in Copart (CPRT).
In my most recent CPRT post, I conclude that I expect its results will continue to impress. With the May 19, 2022 release of Q3 and YTD 2022 results, this is an opportune time to revisit this investment.
Financials
Q3 and YTD2022 Results
CPRT's Q3 2022 Form 8-K can be accessed here.
Despite difficult global economic conditions, CPRT continues to perform well. It is actively expanding its addressable markets by growing the volume of lesser damaged and whole cars from both insurance and non-insurance sellers. In addition, it continues its expansion into international markets in Western Europe (ie. Germany and Spain).
Global unit sales in Q3 increased 12% YoY with an 11% increase in the US and an increase of 18% in international markets.
In the current environment, replacement vehicles are hard to come by. Total loss settlements are, therefore, less compelling than they otherwise would be.
Although CPRT's quarterly results fluctuate, moderate variances should be of little concern to a long-term investor. The focus should be on long-term trends.
While total vehicle loss frequency has declined over the past ~12 months, the 40-year trend is clear. The market should ultimately revert to the historical norm of steadily rising total loss frequencies. Furthermore, other variables such as an increase in accident severity, repair duration, repair labour cost, and rental car cost should contribute to this reversion.
Looking at the history of total vehicle loss, we see that it was ~4% in 1980. Now it is ~20%. This is the product of two key factors:
- vehicle complexity and composition make it more expensive to repair cars; and
- CPRT's auction liquidity and global buyer base make it increasingly efficient to total the vehicles.
Liquidity
In a rising interest rate environment, it is increasingly important to invest in high-quality companies that generate strong earnings and free cash flow (FCF) and which have ample liquidity.
CPRT fits the bill!
Looking at CPRT's financial statements at the end of FY2021, Q1, Q2, and Q3 2022 we see the following:
- FYE2021: CPRT's cash, cash equivalents, and restricted cash amount to ~$1.048 and its TOTAL liabilities are ~$1.033B. CPRT could wipe out 100% of its liabilities and still have $0.015B of cash, cash equivalents, and restricted cash.
- Q1 2022: CPRT's cash, cash equivalents, and restricted cash amount to ~$1.3B and its TOTAL liabilities are ~$1.125B. CPRT could wipe out 100% of its liabilities and still have $0.175B of cash, cash equivalents, and restricted cash.
- Q2 2022: CPRT's cash, cash equivalents, restricted cash, and investment in held to maturity securities amount to ~$1.347B and its TOTAL liabilities are ~$1.047B. CPRT could wipe out 100% of its liabilities and still have $0.3B of cash, cash equivalents, restricted cash and investment in held to maturity securities.
- Q3 2022: CPRT's cash, cash equivalents, restricted cash and investment in held to maturity securities amount to ~$1.68B and its TOTAL liabilities are ~$1.091B. CPRT could wipe out 100% of its liabilities and still have $0.59B of cash, cash equivalents, restricted cash and investment in held to maturity securities.
Add to this an undrawn revolving credit facility with a capacity of ~$1.2B and we have a company with ~$2.9B billion of liquidity.
Given the recent increase in interest rates, CPRT has elected to call the $0.4B of private placement notes due in $0.1B tranches between now and 2029. It will incur a modest prepayment penalty, but management believes this to be the superior choice given cash-on-hand and associated interest savings over the next 7 years. The noteholders have been notified and retirement of this debt is expected early the week of May 23, 2022.
Credit Ratings
There is no debt to rate so CPRT is not covered by any rating agency.
Dividend and Dividend Yield
CPRT does not distribute a dividend.
In FY2012 - FY2021, CPRT's weighted average number of outstanding shares (in millions of shares) was 263, 260, 262, 263, 244, 237, 242, 240, 239, and 240. The diluted weighted average common shares outstanding at the end of Q2 2022 was ~241. It is now ~241.3.
Valuation
My February 17, 2022 post touches upon CPRT's historical valuations.
At the time of that February review, the two online trading platforms I use had yet to be updated to reflect the brokers' earnings estimates based on Q2 and YTD2022 results; I envisioned the brokers would increase their estimates. However, using the existing forward adjusted diluted EPS estimates and the ~$125.70 share price, the forward adjusted diluted PE levels were:
- FY2022 - 10 brokers - mean of $4.31 and low/high of $4.02 - $4.56. Using the current ~$125.70 share price and the mean estimate, the forward adjusted diluted PE is ~29.2.
- FY2023 - 10 brokers - mean of $4.62 and low/high of $4.23 - $5.00. Using the current ~$125.70 share price and the mean estimate, the forward adjusted diluted PE is ~27.2.
Q3 and YTD2022 results have just been released so, once again, the brokers' estimates are likely to be revised over the coming days; I expect these estimates to be revised upwards. Nevertheless, using the existing forward adjusted diluted EPS estimates and the current ~$111 share price, the forward adjusted diluted PE levels are:
- FY2022 - 9 brokers - mean of $4.44 and low/high of $4.25 - $4.87. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~25.
- FY2023 - 9 brokers - mean of $4.72 and low/high of $4.55 - $5.00. Using the current share price and the mean estimate, the forward adjusted diluted PE is ~23.5.
CPRT's valuation has improved in recent months. I consider this an opportune in which to acquire shares.
Final Thoughts
Although CPRT's share price has fallen after my February 17, 2022 post, I am not concerned. I like the company's attractive long-term outlook and continue to periodically add to my exposure. My most recent purchase was another 100 shares @ $116.35 on April 18 in a 'Core' account in the FFJ Portfolio.
I plan to continue to increase my exposure when shares are reasonably valued and I recommend you also consider an investment in Copart. Another purchase of additional shares should occur within the next 72 hours.
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.
