Copart : An unknown leader in a dynamic market

Copart is an American company that’s active in a particular niche, which it completely dominates: the recovery, storage, and sale - directly or via an auction system - of damaged or abandoned vehicles.

 

Although this second-hand market isn’t very well known, it has been growing steadily for thirty years nevertheless. The main sellers are insurance companies - they retrieve vehicles that are damaged or found again after being stolen. The main buyers are automotive professionals who are primarily interested by the restoration potential of the least hopeless cases or, if there isn’t any, by the spare parts or the resale of recoverable materials (scrap metal, plastics, etc.). 

In between the two, comes Copart. As an agent, the company has developed strong relationships with insurers and other sellers (e.g. rental companies such as Hertz and Avis) over time. For buyers, it has developed an online platform powered by a sophisticated auction system. 

It should be noted that, in the vast majority of cases, the vehicles remain the property of the seller until a transaction is completed. This means that Copart does not buy the vehicle in the hope of selling it later on, and thus saves on a massive working capital requirement. 

However, the activity is more capital-intensive than you might think initially, because Copart needs to have large yards to park the stocks of retrieved vehicles and then put them up for sale - there are about 200 of them throughout North America - and teams who are ready to transport the vehicles. Therefore, Copart is not a "pure player" concentrated only on its own digital platform.

Together, the sales network, the territorial network of storage infrastructures and the online platform, which has long been considered as a reference in this field, constitute a major competitive advantage, which is probably difficult - if not impossible - to replicate by a new entrant who would like to try and tackle it. 

 

Overall, the company’s management has executed its growth strategy in North America remarkably well, and has locked the market. For the record, major natural disasters - such as the major hurricanes southern states in the US are used to - are a blessing for Copart; as soon as the storm passes, the company gets its hands on huge new stocks of damaged vehicles.

The strategic objective of the management is now to replicate the North American model in Europe. After a first successful experience in the United Kingdom, the management has decided to focus its efforts on Germany - the main hub of the continental automotive market.

Putting this into perspective with an annualised turnover growth of around 10% over the last decade, Copart’s current valuation - 26 times its latest profits - therefore seems a direct bet on the company’s ability to conquer Europe. 

 

This is a significant opportunity for Copart, since in terms of volumes the European market (excluding the United Kingdom) closely follows the North American market. The company’s operational history, the reliability of its platform and an unparalleled capitalization are all valuable assets up Copart's sleeve to achieve its goals.

Even if past performance does not predict future performance, Copart’s management has, let’s say it once again, been particularly clever in its capital allocation: the growth investments - mainly the acquisition of land to establish deposits, in addition to an upgrade of the IT infrastructure - have been profitable; let us also note a very timely share buyback in 2016, when the stock was trading at around $20 (against $65 today).

Other observations regarding the company’s management: on the one hand, both the president and the CEO are paid exclusively in bonuses and stock options - their fixed salary is only a symbolic $1 - and their remuneration is below modern standards; on the other hand, they have been net sellers of the shares they own for several months now. 

However, the management is showing promising trends for the coming years. For example, the technological complexity of vehicles is constantly increasing, which is not only boosting the demand for spare parts, but also significantly increases the cost of repairs. Encouraged by their insurers, owners therefore often opt to abandon the vehicle - to Copart's great benefit. 

Also, the company's positioning makes it relatively a-cyclical. At the top of the cycle - when users buy a lot of new vehicles - Copart retrieves a lot of old models; at the bottom of the cycle - when the demand for new vehicles is frozen - the company sells its stocks at an accelerated pace to maintain an aging fleet. 

Finally, the price of scrap metal - directly indexed to the price of steel - remains at its lowest levels in ten years. A reversal of the cycle in the steel industry would therefore have a positive effect on the prices Copart makes. As such, there is no doubt that both the company's management and its shareholders will applaud the recent protectionist measures adopted by the Trump administration!

In combination with Copart’s European growth projects and its solid balance sheet, this development represents a good opportunity that has not escaped the attention of analysts, since they have just raised their earnings expectations. It is precisely to take advantage of this positive momentum that MarketScreener has just added the Copart share into its USA Portfolio.

(The author is not a shareholder.)