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Copart (CPRT) is a great company but I can't say the same for its valuation.
I last reviewed CPRT in my September 5 post at which time, the most currently available financial information was for Q4 and FY2024.
Following the November 21 market close, CPRT released its Q1 2025 results thus prompting me to revisit this existing holding.
I have covered CPRT in multiple prior posts that are accessible through the Archives. Some sections of this post, therefore, are similar to my prior post and I merely suggest you refer to my prior post.
In this post, I provide a portion of the earnings transcript (verbatim) of the Q1 2025 earnings call with analysts. I do so because CPRT's CEO provides are great overview thus enabling investors to get a better understanding as to why CPRT is a great company.
I also touch upon why I think investors should consider deducting Stock Based Compensation (SBC) when assessing a company's Free Cash Flow (FCF) - an often used non-GAAP metric.
Business Overview
Refer to my September 5 post.
Q1 2025 Earnings Call Transcript
Today, with the first quarter past us for this next fiscal year, we thought it would be a good opportunity to reflect specifically about our insurance business specifically. There are 2 themes I wanted to draw upon today.
First is our response to the recent hurricane activity in the Southeastern United States. And the second is the longer-term trends that we observe in the insurance industry more broadly.
First, regarding the recent flurry of hurricane activity. In late September of this year, Category 4 Hurricane Helene made landfall in Florida. Severe flooding, of course, struck the Tampa, St. Petersburg area and eventually caused significant damage elsewhere in Florida, Georgia and North and South Carolina, including areas not accustomed to dealing with storms of this magnitude. Then less than 2 weeks later, Category 3 Hurricane Milton struck Florida again. The back-to-back nature of the storms added a level of complexity to our storm response that we hadn't previously experienced, including a brief evacuation of our own people in certain most dangerous areas. In comparison to Hurricane Ian, a similarly scaled and located storm from just 2 years ago, our advanced preparation and our team's execution this time around yielded still better results with approximately twice as many vehicles picked up in the first 10 days of these 2024 storms in comparison to Ian in 2022.
As always, our emphasis is on retrieving, processing and selling vehicles as quickly as we can to help restore the communities in which we do business back to their prior state and to assist our clients, the major insurance companies in resolving their claims with policyholders as quickly as they can. To that end, by the end of October, just 3 weeks after landfall for Milton, we had sold approximately 1/4 of all of the assigned vehicles we would ultimately receive from both Helene and Milton.
In fact, according to one third-party source, 3 out of every 4 catastrophic units sold in Florida during the month of October were sold on Copart's auction platform, a reflection both of our presence as well as the speed of our execution. This go around, our proactive storm preparation was marked by 3 pillars.
First, the dedicated owned storage capacity that we hold in reserve for storms of this nature, representing nearly 2,000 acres nationwide and approximately 1,000 acres specifically for the Helene and Milton areas alone.
Second, our technology and logistics teams have deployed real-time tools that serve both our own people as well as our third-party towing network as well as our own employed drivers in optimizing routing and optimizing dispatch for the rapid retrieval and movement of vehicles through our network. And finally, our Industry-leading contracted and full-time towing and transport network, which we have steadily built up over the years, was able to respond with unprecedented speed in this instance.
I've already had an opportunity to do so face-to-face with many of the Copart employees, but we again wanted to extend our heartfelt gratitude to the more than 1,200 folks and their families who sacrifice 4 days, in some cases, weeks and months at a time to work in challenging conditions to work long hours to assist again, our clients, our people and our communities.
Turning our attention to our insurance business more broadly.
Our insurance business grew approximately 13% for the quarter in unit volume when excluding the effect of catastrophic events, we grew 9% year-over-year for the quarter. Total loss frequency was certainly one of the major catalysts we experienced with total loss frequency for the calendar quarter ending September 30 reported by of Care, Custody, or Control (CCC) of 21.7%, an increase of almost 2% year-over-year.
More broadly, though, we wanted to pause for a moment to reflect on longer-term industry trends. There, as you know, have been a steady drumbeat in the news media and in various company announcements on accident of [indiscernible] technologies and autonomous driving rollouts over the past decade plus. And in addition, we have encountered a number of inquiries in recent days from investors and other interested parties on this subject as well.
Our answer here will be especially U.S. centric with the takeaways, I think, are broadly applicable to the markets in which we do business.
We all, of course, draw inference from our own empirical experience. The cars we drive, we now experience more of the safety technologies in the form of lane departure warning systems that buzz our steering wheels. Rear cameras that we probably all use when we back up our cars nowadays. And many of us have also taken rides in autonomous taxis within the geo-fence areas in which they're operating today. We think there's also insight to be derived, however, from multiple decade trends that we can observe in actual data.
There are 4 factors I wanted to draw out today. And then a secondary consideration I wanted to offer that inform our perspective on the long-term organic growth trends in our business.
The first is simply population growth. Since 1960, population in the United States has grown at 1% compounded which sounds like a fairly modest growth rate, but over a time horizon of that scale, our population has almost doubled in the United States.
The second consideration is vehicle miles traveled, which over that same horizon, plus or minus, has grown at 2%.
As a result, vehicle miles traveled over that horizon has quadrupled from 1960 to today, which is to say that ultimately, vehicle miles traveled as the country grows more populous and more prosperous as United States has done generally outpaces population growth alone.
We're all aware, of course, of the anomalous very well-documented steep decline in vehicle miles traveled in 2020, courtesy of COVID-19.
We are now above pre-pandemic peaks on this specific metric.
If you were to look at a visual chart showing vehicle miles traveled over this 60-plus year period, I think you'd likely also conclude that we still have several years of return to work tailwinds ahead of us as more and more businesses implement those policies.
The third phenomenon I wanted to comment on specifically is accident rates and their long-term trend downwards.
So over the past 30 years, the Department of Transportation has published data on police reported crashes. There is one anomalous trend from the 2014 to 2018 period, I think, marked likely by the proliferation of smartphones and the addictive apps that certainly afflict us all that caused accident rates actually to increase in certain years during that period. But nonetheless, over the decades long horizon we've seen a steady decline in accidents per miles driven. And in fact, today versus 1990, there are approximately 1/3 fewer crashes and fatalities per million miles driven. But in absolute terms, that decline has only been 8% because of the offsetting effects of the growth in population in vehicle miles traveled.
Safety technologies penetrates gradually into new vehicle shipments and still more gradually into the installed base of drivable vehicles. And it is that fleet effect, which causes the gradual decline in accidents relative to the perhaps more innovative technology deployments exhibited or implemented by OEMs today.
And then the fourth and most important driver of our business is total loss frequency itself. It has been the key catalyst in our growth now for decades, and it's grown more than fourfold since 1990. This, again, is a phenomenon that has exhibited a nearly monotonic increase over that period, but for an anomaly in late 2021 and early 2022 when the pop and used car prices made total loss a relatively expensive settlement procedure for insurance companies, briefly suppressing total loss frequency.
We are yet again above pre-pandemic highs on this specific metric. The long-term catalyst here is that vehicles become ever more complex, including for reasons the safety technologies we've already talked about today and, therefore, more expensive to repair rendering the repair path less attractive while also the intrinsic value of these vehicles rise via our marketplace.
We find still more buyers in places like Eastern Europe, Central and South America, Africa and elsewhere where their mobility needs are ultimately satisfied by our wrecked cars.
The proliferation of safety technologies that drive accident frequency down, and by the way, there have been multiple rounds of these technologies over the decades from anti-lock brakes in the '70s and '80s to the more sensor-driven technologies of today. But the proliferation of these technologies is not incidental to total loss frequency, but in fact, it's directly causal. These technologies tend to be enabled by sensors and chips often configured on the perimeter vehicles rendering them quickly and easily damaged in an accident in raising the cost of repair as a result. Those cars in turn are still quite valuable to our destination markets as drivable contributors to the mobility in those markets.
One additional secondary driver, I thought was worth mentioning today is the phenomenon of uninsured, under-insured and under-capitalized motorists specifically.
On the point of uninsured or liability only drivers. There is a very clear 30-year-plus trend downward meaning over time in a market like the United States, insurance coverage generally becomes more robust. We do, however, observe cyclicality within that longer-term secular trend driven in part by insurance premiums, the economic health of the country and so forth. In the past year or 2, in particular, the insurance premiums have generally increased at a pace -- at a rate outpacing other components of the consumer experience, in part because of the natural regulatory lag in raising insurance rates.
As a result, then, the liability only plus uninsured motors combined are a greater share of the drivable fleet than they had been in prior years. Again, the long-term trend here appears to be a secular trend downwards in any case.
The upshot of all of the above for us is that as we look forward on a 5-, 10- and 20-year horizon, our baseline expectation continues to be of ongoing organic industry growth as population and vehicle miles traveled trends plus total loss frequency, most importantly of all, more than offset declining accident frequency, safety technologies penetrates new vehicle shipments and eventually the drivable fleet. We do expect perhaps more volatility from contributors such as used car prices from severe weather events and the like on both fronts then we're investing accordingly to ensure that we have the physical technology and people capacity to serve our insurance clients under any conditions.
Financials
Q1 and FY2025 Results
CPRT's financial results are available through the SEC Filings section of the company's website.
The company's cash, cash equivalents, and restricted cash and investment in held to maturity securities increased to ~$3.7B versus ~$3.4B at FYE2024 (July 31). This ~$0.3B increase is despite an increase in property and equipment of over ~$0.18B!
It continues to have no debt on its Balance Sheet and if it were to collect 100% of its ~$0.802B of accounts receivable in one fell swoop, it could wipe out over 80% of ALL liabilities.
In Q1, CPRT generated ~$0.482B of net cash provided by operating activities versus ~$0.375B in Q1 2024.
Purchases of property and equipment in Q1 amounted to ~$0.237B versus ~$0.162B in Q1 2024.
If we subtract ~$0.237B from ~$0.482B we arrive at ~$0.245B of Free Cash Flow (FCF) generated in Q1 alone.
As explained in various recent posts, I am now deducting SBC when determining a company's net cash provided by operating activities. This is particularly important when a significant component of a company's employee compensation is in the form of SBC.
Why?
Let's suppose a company grants a significant number of company shares to employees as part of its various compensation packages. This form of remuneration is not reflected on the Income Statement to determine Net Earnings. If the company did not grant this SBC, however, you would think it would need to boost salaries/wages in order to retain its employees. These higher wages/salaries WOULD be reflected within the Income Statement thus having an impact on earnings.
Some investors may resort to the argument that a company is issuing shares to its employees but is often offsetting these new shares by repurchasing an equal or greater number of shares.
Having looked at countless Form 10-Ks over the years, I see companies granting stock options at prices that are often far below current share prices. So....you have a company repurchasing a boatload of shares at $X but it is issuing shares to employees (with a significant component to senior management) at a small fraction of $X. As a retail investor with an insufficient number of shares to sway the decision making at the Board level, I have no choice but to watch my investment in a company being eroded while insiders and employees are being enriched.
Don't believe me? Have a look at the Consolidated Statement of Cash Flows for some high flying technology companies!
In the case of CPRT, fortunately, SBC of ~$0.010B is relatively immaterial and FCF is ~$0.235B.
Capital Allocation Strategy
Refer to my September 5 post.
Operating Cash Flow (OCF), Free Cash Flow (FCF), and CAPEX
Refer to my September 5 post.
Return On Invested Capital (ROIC)
Refer to my September 5 post.
FY2025 Outlook
CPRT does not provide any outlook.
Risk Assessment
CPRT has no debt to rate.
Dividend and Dividend Yield
CPRT has not paid a cash dividend since becoming a public company in 1994.
Stock Splits
Refer to my September 5 post.
In FY2013 - FY2024, CPRT's weighted average number of outstanding shares (in millions of shares rounded) was 1,038, 1,050, 1,051, 977, 948, 968, 962, 955, 961, 965, 967, and 975.
On September 22, 2011, CPRT's Board authorized a 320 million share increase in the stock repurchase program, bringing the total current authorization to 784 million shares.
Share repurchases were made in:
- 2013: $572 thousand
- 2014: $15,009 million
- 2015: $233,484 million
- 2016: $442,855 million
- 2018: $364,997 million
No repurchases were made in FY2017, FY2018, FY2020 - FY2024, and Q1 2025 with the capital allocation priority being on expanding operations.
Stock based compensation during the FY2013 - FY2020 time frame has hovered in the $18 - $24 million range. In FY2021 - FY2023, this increased to the $39 - $41 million range before pulling back to ~$35 million in FY2024.
It is readily apparent that CPRT could repurchase a significant number of its shares. Having said this, the most optimal means by which to allocate capital is not always in the form of share repurchases.
Valuation
Please refer to prior posts in which I analyze CPRT's valuation at various points in time; CPRT's valuation is unlikely to sit well with 'value investors'.
I acquired additional shares at ~$53.93 on May 17. Using this share price and the broker adjusted diluted earnings estimates at the time, the forward-adjusted diluted PE levels were:
- FY2024 - 11 brokers - ~37.2 based on the mean of $1.45 and low/high of $1.43 - $1.49.
- FY2025 - 11 brokers - ~33.1 based on the mean of $1.63 and low/high of $1.55 - $1.68.
- FY2026 - 5 brokers - ~30 based on the mean of $1.79 and low/high of $1.65 - $1.89.
CPRT generated $1.42 of diluted EPS in FY2024. Following the earnings release after the September 4 market close, the share price pulled back on September 5 thus prompting me to acquire an additional 200 shares @ $49.16. Using the trailing 12-month EPS, CPRT's diluted PE was ~34.62.
When I composed my September 5 post, the forward-adjusted diluted PE levels were (based on my $49.16 purchase price):
- FY2025 - 10 brokers - ~31.1 based on the mean of $1.58 and low/high of $1.48 - $1.67.
- FY2026 - 6 brokers - ~28.25 based on the mean of $1.74 and low/high of $1.65 - $1.89.
- FY2027 - 2 broker - ~25.2 based on the mean of $1.95 and low/high of $1.90 - $2.00.
On a FCF basis, CPRT generated $0.962B in FY2024. The weighted average diluted shares outstanding in Q4 was 976,500 million and 974,798 million in FY2024. Dividing $962 million by 976,500 million shares, I arrived at ~$0.99 FCF/share. Using my $49.16 purchase price, the forward P/FCF was ~50.
I then performed a P/FCF sensitivity analysis to determine what would happen if it were to repurchase shares.
If CPRT were to allocate $0.5B toward the repurchase of its shares at ~$50/share, it could repurchase ~10 million shares. In doing so and continuing to issue shares as part of its compensation structure, the FY2025 weighted average could drop to ~967 million shares. If it were to generate $1.1B of FCF in FY2025, we would be looking at FCF/share of ~$1.138. Using my $49.16 purchase price, the forward P/FCF is ~43.2.
Were CPRT to double its repurchases to ~$1B @ ~$50/share, it could repurchase ~20 million shares. At this level, the FY2025 weighted average could potentially drop to ~957 million shares. If it were to generate $1.1B of FCF in FY2025, we would be looking at FCF/share of ~$1.15. Using my $49.16 purchase price, the forward P/FCF is ~42.7.
Were CPRT to generate ~$1.2B of FCF in FY2025 and the FY2025 weighted average were to drop to ~957 million shares, we would be looking at ~$1.254 FCF/share. Using my $49.16 purchase price, the forward P/FCF is ~39.2.
In Q1 2025, CPRT generated $0.37 EPS versus $0.34 in Q1 2024.
Using the current broker estimates and the $62.70 share price at the November 22 market close, the forward-adjusted diluted PE levels are:
- FY2025 - 10 brokers - ~40.5 based on the mean of $1.55 and low/high of $1.48 - $1.61.
- FY2026 - 10 brokers - ~36 based on the mean of $1.74 and low/high of $1.68 - $1.81.
- FY2027 - 3 brokers - ~32 based on the mean of $1.96 and low/high of $1.95 - $1.97.
In FY2022 - FY2024, CPRT generated FCF (Net cash provided by operating activities - CAPEX - SBC)
- FY2022: ~$1.177B - $0.338B - $0.039B = ~$0.8B
- FY2023: ~$1.364B - $0.517B - $0.040B = ~$0.807B
- FY2024: ~$1.473B - $0.511B - $0.035B = ~$0.927B
CPRT generated ~$0.235B of FCF in Q1 2025. If it generates a comparable level of FCF in each of the next 3 quarters, the FY2025 FCF should be ~$0.94B. Let's give CPRT the benefit of the doubt that the next 3 quarters will be somewhat better than Q1 and it will generate ~$0.96B of FCF in FY2025.
The weighted average shares outstanding in FY2022 - FY2024 and Q1 2025 (in millions) are 964.6, 966.7, 974.8, and 976.5. Repurchasing shares is not a capital allocation priority so let's presume the weighted average shares outstanding in FY2025 will be 978 million.
Divide ~$0.96B by 978 million shares and we get ~$0.98 FCF/share. With a current $62.70 share price, the estimated P/FCF is ~64.
If the share price were to retrace to ~$55 and my ~$0.98 FCF/share ends up being reasonable, we're looking at a P/FCF of ~56. Even at $55, this would not be a company 'on sale'. I am, however, prepared to 'pay up' for such a high quality company!
Final Thoughts
I initiated a position on February 17, 2022 in one of the 'Core' accounts within the FFJ Portfolio at a split adjusted cost of ~$31.31. Following several additional purchases, I now own:
- 2,600 shares at an average cost of ~$35.4537 in a 'Core' account within the FFJ Portfolio;
- 400 shares at an average cost of ~$54.60 in a different 'Core' account; and
- 540 shares at an average cost of ~$53.93 in a 'Side' account.
My weighted average cost is ~$40.44.
When I completed my 2024 Mid Year FFJ Portfolio Review, CPRT was my 10th largest holding.
In addition, a couple of young investors I am helping on their journey to financial freedom have CPRT exposure; I do not disclose details of their investments and exclude these shares when I complete my Mid Year and Year End FFJ Portfolio Reviews.
Sometimes you have to pay up a bit when investing in a great company. I am not prepared, however, to increase my CPRT exposure at any valuation and will bide my time before acquiring more shares.
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.
