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WIKI ANALYSIS
Copart (NASDAQ: CPRT) runs an online auction system for salvage vehicles - damaged cars which insurance companies have deemed too costly to repair, often termed a "total loss". Buyers purchase these cars primarily to dismantle them and reuse the parts; however, some used car dealers repair and sell cars purchased from Copart. Copart charges both buyers and sellers to participate in the auction - sellers generally pay a fee based on the final sale value of the vehicle. There, however, is increasing competition in the growing salvage vehicle industry after the merger of Copart's competitors Adesa (KAR) and Insurance Auto Auctions Inc.
Company Overview
Copart does two types of business: Remarketing Services, and Vehicle Sales. Though there is some overlap, Copart primarily does Remarketing Services in the United States, and Vehicle Sales in the United Kingdom. It uses an internet auction system exclusively for both remarketing and vehicle sales.
Remarketing Services (US Business)
Copart profitably connects buyers and sellers of refurbished vehicles with online auctions. Insurance companies, junk-yards, and some wholesalers have many broken down cars declared as "total losses". They pay Copart to fix up holes and engines problems, and deal with state DMV registration and legal ownership issues. Once everything is taken care of, and the car is road-ready, the insurance company pays Copart to list it on its auction website. Bidders buy cheap cars at the auction, and pay part of the asking price to Copart (the rest goes to the insurance company who owns the car). [1]
Notice how Copart does not actually own the cars in Remarketing Services. This is a mainly North American business practice, and differs from Vehicle Sales (the UK segment).
Vehicle Sales (UK Business)
In the UK, Copart buys unusable cars from insurance companies, junk yards, or other sources. Then it fixes them up and sells them at a profit. Because this requires holding an inventory and paying money up-front, it has lower margins than Remarketing Services.
Financial Ratios
Copart has extremely good profitability ratios compared to other firms in the used car sales business because of its ability to make money on cars without actually owning them. Because Copart's internet based business does not require owning a lot of assets, it has a corresponding high ROA. Higher margins have translated to higher profits for Copart year after year, represented by the company's abnormally high return on equity.
Copart is extremely fiscally conservative, having a current ratio of 2.5. Companies with current ratios of 2.5 and above tend not to expand their business line, as it means they have a relatively low amount of debt to fuel expansion (they are de-leveraged). Making $257,154 of revenue per employee means that Copart has an extremely lean and productive work-force. With a capital spending 5 year growth rate of over 20%, the company has clearly been expanding its operations without hiring new workers which explains its high worker productivity.
Buying a piece of Copart's physical operations (Price/book) is relatively more expensive than most other used car companies because Copart's assets are so productive on a dollar per dollar basis (a website is cheap to run). Copart's marketing expenses are far more significant than its asset depreciation, as the company recently opted into a large NASCAR sponsorship. Copart used its substantial free cash flow to fuel these marketing efforts, in line with its fiscal conservatism.
Copart's conservative balance sheet and financial strength undoubtably make it stable, but its low price to earnings ratio signal that investors do not think it will enjoy the same upside as other companies such as Buffett's pick, CARMAX (KMX) , when the economy recovers. [2]
Q1 FY2011 Quarterly Earnings
- Copart posted earnings of $37.8 million for the first reporting quarter of FY2011 ending October 31, 2010, an increase of 7.08% compared to same quarter last year of $35.3 million.
- Total service revenues and vehicle sales were $212.67 million, a 14.7% increase compared to $185.46 million same quarter last year; this figure beat analyst estimate of $194.41 million for the first quarter.
Q2 FY2011 Quarterly Earnings
- CPRT posted net income of $37.9 or $0.46 EPS for the second quarter of FY2011, an increase of 6.2% compared to same quarter last year of $35.7 million or $0.42 EPS.[3]
- Top-line sales grew by 17.4% to $207.38 million, which also beat analyst consensus estimates of $196.99 million.[4]
Key Trends and Forces
Increased Vehicle Use and Service Needs Positively Impact Copart's Business Operations
The volume of cars being driven in the United States as well as worldwide has increased substantially over the last several decades. Light vehicle sales are expected to double in India and triple in China by 2015.[5] More cars on the road leads to more accidents and more salvage vehicles, creating greater demand for Copart’s services. The worldwide increase in driving provides substantial overseas growth opportunities for Copart, and they are actively looking to acquire new storage facilities in foreign markets.[6]
Some trends that cause people to drive more are good weather, and relatively low gas prices.
Cost Pressures on Car Insurance Companies will Increase the Demand for Salvage Vehicle Parts.
Insurance companies are facing shrinking premium margins as well as higher transaction costs. To cut costs elsewhere, insurance companies have begun a gradual shift toward using recycled parts from salvage vehicles rather than those produced by original equipment manufacturers.
Fluctuating Prices per Tonne of Scrap Metal Affect Copart's Earnings
When aluminum, metal, and copper are worth a lot, companies buy Copart vehicles at auction just to sell for scrap metal. When and if durable demand picks back up, so will metal prices. This will improve the sale price of Copart's vehicles, and improve their profits.[7]
Competition
Copart faces competition from salvage vehicle auction and sales companies and vehicle dismantlers.
- Adesa/IAAI The second largest player in the salvage vehicle industry behind Copart is Adesa Corporation which merged with Insurance Auto Auctions Inc. in a deal to take both companies private. Adesa/IAAI employs 11,000 workers in the United States and Canada and provides services such as salvage auctions, repossessions, lease end of term support, and title licensing.[8]
- Manheim Auctions Manheim Auctions employs 34,000 workers worldwide and provides vehicle remarketing services. They bring sellers and volume buyers of used cars together using live and online auctions. Although this is not its only business, Manheim competes directly with Copart in their salvage vehicle remarketing business.[9]
- Greenleaf Auto Recyclers Greenleaf is a national vehicle dismantler. They purchase vehicles from auctions, dealerships, and directly from insurance companies and then resell the used parts. Greenleaf is able to purchase salvage vehicles directly from insurance companies, ensuring that the salvage parts come to market while bypassing Copart's auctions.
Copart has significant advantages over these firms. Their patented software allows them to more efficiently run salvage vehicle auctions as well as attract buyers from any geographic location. Also, smaller companies face significant barriers to entry due to environmental and zoning issues that make it difficult to procure land for operations.
Market Share
Copart holds 35% of the salvage vehicle auction market based on units sold by firms that run salvage vehicle auctions. The data excludes dismantlers that purchase salvage vehicles directly from suppliers who represent a small segment of the industry. IAAI and ADESA have 23% market share while the rest of the space is filled by smaller, independent, privately owned companies.
Despite its large market share, Copart faces a large threat of substitution from used car dealers like CARMAX (KMX) and AutoNation (AN), which are 3.53 and 3.65 billion market cap companies respectively (Copart is 2.92 billion). Together, these massive companies control less than 3% of the entire US used vehicle market, with private individuals and franchised dealerships controlling the rest.
References
- ↑ The Copart 2008 Annual Report, p. 37
- ↑ |Copart Competitiveness
- ↑ Copart Q2 Profit Rises - Quick Facts
- ↑ Copart 2Q Profit Up Better-Than-Seen 6% On Strong Sales
- ↑ "Cheap Cars in China, Expensive Gas Everywhere, February 19, 2008
- ↑ stock:Copart_(CPRT)/Filing/10-K/2007/F2328119 CPRT 2007 10-K, Page 7
- ↑
- ↑ Adesa Company Overview
- ↑ About Manheim
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