Copart (CPRT)

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Copart has grown from operating 1 facility in 1982 to 131 by July of 2007, and it has grown revenues from $335 million in 2003 to $561 million in 2007.^[1] There is heavy competition in the growing salvage vehicle industry, especially after the merger of Copart's competitors Adesa (KAR) and Insurance Auto Auctions Inc. Copart's arrangements with their salvage vehicle suppliers are generally subject to cancellation with 30 to 90 days notice, so these competitors threaten to take clients from Copart at any time.

[edit] Business and Financials

Copart Inc. was founded in 1982 with the purchase of a single salvage yard. The company went public in 1994 and now has 131 facilities in the United States, Canada, and the United Kingdom, selling over 1 million cars per year.^[2]

Copart comes to agreements with individual salvage vehicle suppliers, most often insurance companies who own cars they have declared a total loss, to run auctions while taking a predetermined percentage of the total sale. Copart will wash the cars, taping up holes, process DMV documents and titles, and transport and store the car. Copart also charges salvage vehicle buyers annual fees as well as registration fees for each auction. ^[3]

Copart generated $570 million in revenues in FY 2007 compared to $529 million in FY 2006 and $335 million in FY 2003. Their bottom line has experienced similar growth, as they earned operating income of $90 million in FY 2003, $172 million in FY 2006, and $203 million in FY 2007.^[4]

Online auctions are more than just a convenience for Copart's clients. Online auctions eliminate the need for buyers to attend in person, which increases the number of buyers at each auction. With more buyers, sale prices increase, and therefore so does the value of Copart's percentage of the sale. And, the influx in buyers earns the company more in buyer fees.^[5]

Since the beginning of FY 2005, Copart has acquired 16 vehicle storage facilities and established 14 new facilities. These include 7 facilities acquired in 2007 in the United Kingdom which have begun earning revenues. Copart has also been active in acquiring smaller vehicle salvagers such as the British firm Universal PLC in June of 2007.^[6] Copart's expansion into the UK forced them to take one time charges that harmed their 2007 earnings and disappointed many on Wall Street. However, analysts believe that their international growth will give them a foothold in the European salvage vehicle auction market and provide new sources of profits and revenues. The UK operations accounted for 24% of FY 2008 first quarter earnings in the first full quarter of ownership of the businesses.^[7]

[edit] Trends and Forces

[edit] Americans and individuals worldwide are driving more, which increases the supply of salvage vehicles.

The volume of cars being driven in the United States as well as worldwide is increasing. Since 1970, the number of registered vehicles in the United States has grown every year except for 1991 and 2002. ^[8] Light vehicle sales are expected to double in India and triple in China by 2015.^[9] 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.^[10]

[edit] 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. In 2000 OEM parts accounted for 77% of the collision replacement market, but only 70% by 2006.^[11] Increased demand for recycled parts will boost buyer attendance at Copart’s auctions increasing their revenues.

[edit] Copart’s UK expansion poses substantial inventory risks.

Copart’s UK operations differ from those in North America. Rather than acting strictly as an intermediary, in the UK Copart buys salvage vehicles directly from insurance companies and then resells them to buyers. By owning the vehicles outright for the period between purchase and sale, Copart risks losses from damage, theft, devaluation, and obsolescence.^[12] However, the principal ownership model in the UK facilities has the benefit of boosting margins since Copart earns the full revenue of the sale.^[13] As of 2007, Copart owned 7 salvage vehicle storage facilities in the UK along with the vehicles being stored there.

[edit] Rising Oil Prices will decrease miles driven resulting in fewer accidents.

Copart relies on a steady supply of salvage vehicles to earn revenue. Rising fuel costs decreases total miles driven as drivers cut down on driving in order to reduce spending on fuel. An overall reduction in miles driven results in fewer accidents and subsequently fewer salvage vehicles. A decrease in miles driven will also lessen wear and tear on vehicles diminishing the demand for recycled parts. With oil prices surging in early 2008, and remaining well over $100 a barrel, gas is very expensive in most parts of the world. This lowers the volume of cars sold in Copart's auctions, and less revenue from the associated fees.

[edit] Better than average weather reduces the supply of salvage vehicles, creating less demand for Copart's services.

Copart requires a steady supply of salvage vehicles in order to earn revenues through their auction process. Accidents are more likely to occur in inclement weather, so extended periods of good weather reduces the supply of salvage vehicles, decreasing the volume of transactions performed by Copart and pressuring their revenues. Before the implementation of VB2, bad weather, although good from a supply standpoint, harmed buyer attendance at auctions. But since its implementation, buyers do not have to physically attend auctions and therefore bad weather is no longer a bane to buyer attendance - and only helps Copart by increasing the number of vehicles it can sell at auction.

[edit] 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 December of 2006 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.^[14]

• 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.^[15]

• 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.

[edit] 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.^[16]

[edit] References

1. ↑ CPRT 2007 10-K, Pages 7-8
2. ↑ Copart Company Profile
3. ↑ CPRT 2007 10-K, Pages 11-15
4. ↑ CPRT 2007 10-K, Page 37
5. ↑ [CPRT 2007 10-K, Page 4
6. ↑ CPRT 2007 10-K, Page 40
7. ↑ RBC Initiating Coverage, CPRT, December 14, 2007
8. ↑ US Department of Transportation Federal Highway Administration
9. ↑ "Cheap Cars in China, Expensive Gas Everywhere, February 19, 2008
10. ↑ CPRT 2007 10-K, Page 7
11. ↑ CCC Information Services Inc.
12. ↑ CPRT 2007 10-K, Page 21
13. ↑ CPRT 2007 10-K, Page 7
14. ↑ Adesa Company Overview
15. ↑ About Manheim
16. ↑ RBC Initiating Coverage, CPRT, December 14, 2007