Introduction
On October 3, I wrote an article titled "Copart: A Top-Tier Compounder I'm Buying On Weakness."
Well, that didn't work out as I expected.
Since then, Copart (NASDAQ:CPRT) shares are up 24%, bringing the 10-year return to a staggering 1,090% - more than 4x the return of the S&P 500!
What we are dealing with here is one of the biggest American success stories.
Copart, which went public in 1994, was founded by Willis Johnson.
Mr. Johnson, who was awarded a Purple Heart for his tour in Vietnam, bought a junkyard in 1972. This operation has turned into a stock-listed giant with a market cap of more than $50 billion, which has made him one of the richest Americans, as the Copart Chairman still owns 5.7% of the company he founded.
When I look back, I think my success is partly due to the lessons my father taught me and partly due to God's hand guiding me along the way. I also think a good portion of it has to do with the fact it never occurred to me that what I was doing may not work. I never thought I couldn't do it. Some may call it confidence. - Willis Johnson
In this article, I'll take a closer look at the company, update my thesis, and explain how I'm dealing with a company that likely has a very bright future ahead.
So, let's get to it!
The Perfect Business Model For Growth
Headquartered in Dallas, Texas, Copart operates in 11 countries, including the United States, Canada, the U.K., Brazil, Ireland, Germany, Finland, and others.
However, as more than 80% of its revenues came from the U.S. last year, that's the main market to focus on.
So, what does the company do?
As it all started with a junkyard, we can assume that the current business still has something to do with old cars.
That's correct.
Copart has become a leading provider of online auctions and vehicle remarketing services.
Essentially, the company plays a major role in the global recycling and reuse of vehicles, parts, and raw materials.
This isn't just profitable, but also a way to add to sustainability.
Vehicles that pass through Copart's system are often restored, dismantled for parts, or scrapped for raw materials.
As the company's overview from 2016 shows, demand drivers are a mix of the following factors:
- Total miles driven: impacted by population growth, fuel prices, employment, and urbanization.
- Accident rate: the more accidents, the more need for scrap services and new parts.
- Salvage rates: impacted by fleet ages, vehicle complexities, and related factors.
Please note that the bullish/bearish drivers after eight years have changed.
After eight years, the bull case isn't any weaker. While low fuel prices are gone, population growth is still strong (supported by mass immigration), re-urbanization has turned into people moving to rural areas (very bullish), and road congestion is still an issue.
On top of that, the aging fleet has become a much bigger issue (also bullish).
As I wrote in a recent article, the average age of cars on American roads is now 14 years old. Including much younger light trucks, the combined average age is 12.6 years - a new record!
This is what S&P Global had to say about this, which published the chart above (emphasis added):
This continues to improve business opportunities for companies in the aftermarket and vehicle service sector in the US, as repair opportunities are expected to grow alongside vehicle age.
"With average age growth, more vehicles are entering the prime range for aftermarket service, typically from 6 to 14 years of age," said Todd Campau, aftermarket practice lead at S&P Global Mobility. "With more than 110 million vehicles in that sweet spot — reflecting nearly 38 percent of the fleet on the road — we expect continued growth in the volume of vehicles in that age range to rise to an estimated 40 percent through 2028." - S&P Global
Going back to Copart, the company has a number of services for vehicle sellers, including insurance companies, banks, charities, and individuals.
Its primary sellers are insurance companies that need to get rid of vehicles damaged by accidents or natural disasters.
Buyers are typically vehicle dismantlers, rebuilders, and used vehicle dealers/exporters.
It has auction platforms that support internet-based sales to scale its operations more effectively. Its virtual bidding system ("VB3"), for example, aims to improve the sales price and keep administrative costs low.
On top of that, the company offers a wide range of related services, including salvage value estimates (Copart ProQuote), machine learning to optimize seller auction decisions (IntelliSeller), and others.
Moreover, and this is a big deal, the company owns almost all of its land, which reduced inflationary pressures due to the absence of major rent costs.
As I've highlighted in the past, we expect our capital allocation strategy will enable Copart to focus entirely on delivering outstanding products and services. To further this objective, over the last 12 months, we have deployed over $540 million into our real estate portfolio, lease and technology. Today, our global portfolio of approximately 19,000 acres of outdoor vehicle storage, a robust fleet of transportation assets and more than 2 decades of virtual auction technology development are the foundation of what truly differentiates Copart. - CPRT 3Q24 Earnings Call
Personally, I love it when companies outright own strategic assets, as it adds a value-like real estate aspect. That's also one of the reasons why I bought Old Dominion Freight Line (ODFL), which owns more than 90% of its less-than-truckload service centers.
With that said, the market seems to like this business model as well, as its stock price has gone up more than 1,000% over the past ten years.
So, what does this mean for investors? And what do the numbers tell us?
The Risk/Reward After A 1,000% Surge
In light of secular tailwinds, the company continues to do well.
In the third quarter of its 2024 fiscal year, the company reported a 6.8% surge in U.S. insurance volumes, driven by a recovery in total loss frequency to pre-pandemic levels.
According to the company, this recovery is supported by the declining prices of new and used vehicles combined with elevated repair costs, which makes it economically more attractive for insurance carriers to total vehicles instead of repairing them.
Meanwhile, the total loss frequency was 21.1% in the first calendar quarter of 2024. That's 150 basis points higher compared to the prior-year quarter.
Moreover, Copart's non-insurance business segments have shown promising growth trends.
- The Blue Car business, which serves bank and finance, fleet, and rental segment partners, saw a year-over-year growth of almost 24%.
- Dealer sales volumes, which are handled through Copart Dealer Services and NPA, increased unit volumes sold by nearly 18%.
- Overall, the U.S. non-insurance automotive and dealer volume, excluding low-value and wholesale units, saw a 19% year-over-year increase.
On top of that, the company has expanded its capabilities to better respond to natural disasters, which includes improving teams, logistics, and real estate for peak capacity.
Furthermore, looking at the bigger picture, total unit sales increased by 11% in the third fiscal quarter, supported by a higher market share.
Global revenues were up 10% to $1.13 billion. This helped the company boost net income by 16.9% to $382 million.
The company is also highly efficient when it comes to generating cash.
On top of boasting a 34% net income margin (the S&P 500 net profit margin is 13%), it generated $408 million in free cash flow from $496 million in operating cash flow and $382 million in net income.
It also helps that the company has $4.3 billion in liquidity, including more than $3 billion in cash and investments.
This year, analysts expect the company to end up with $1.6 billion in net cash, which implies more cash than gross debt.
Speaking of expectations, using the FactSet data in the chart below, analysts expect EPS growth to remain elevated.
After this year's expected 14% surge, 2025 and 2026 are expected to see 13% and 17% growth, respectively.
The bad news is that a lot of growth has been priced in, as CPRT trades at a blended P/E ratio of 37.5x.
This is a mile above the company's normalized P/E ratio of 25.1x, which gives the stock a fair stock price of roughly $48-$50, slightly below the current price.
Although I believe a premium is warranted to reflect favorable business conditions, I'm not a fan of paying close to 38x earnings in an environment of potential demand risk.
As we can see below, consumer sentiment showing buying conditions for vehicles is extremely poor for lower-and middle-class households.
While this certainly supports the demand for used vehicles compared to more expensive new vehicles, I would like to see some weakness in CPRT's stock price first before I change my rating to a Buy rating.
As much as I love this American success story, the price tag is just too high for my taste.
Takeaway
Copart's impressive business model, supported by strategic assets and expanding services, continues to thrive in light of favorable industry trends.
Unfortunately, despite favorable growth and strong financials, the current valuation feels lofty, with a P/E ratio of 37.5x.
As much as I admire Copart's success, I prefer to wait for a more attractive entry point before considering it a Buy.
For now, I'll keep this high-flyer on my watchlist instead of in my portfolio.
Test Drive iREIT© on Alpha For FREE (for 2 Weeks)
Join iREIT on Alpha today to get the most in-depth research that includes REITs, mREITs, Preferreds, BDCs, MLPs, ETFs, and other income alternatives. 438 testimonials and most are 5 stars. Nothing to lose with our FREE 2-week trial.
And this offer includes a 2-Week FREE TRIAL plus Brad Thomas' FREE book.
