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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 operates 147 facilities in three countries as of July 2009.[1] 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.
Falling metal prices from 2007-2009 have adversely affected the selling price of Copart's vehicles (the vehicles are often sold as scrap metal), but the Company has still managed to expand heavily into the UK. As a result, a strengthening dollar hurts the company's bottom line. On the other hand, insurance companies are increasingly looking to cut costs and turning to salvaged vehicle parts to do so.
Copart has been hurt by tough scrap and steel pricing in 2009, with prices down 60%. Quarterly earnings in Fall 2009 fell 15% due to lower auction-fee revenue. [2]
As of Summer 2009, Copart has started mass-market advertising to improve awareness of its website, sponsoring NASCAR's camping world truck series, which is now called The Copart 200. The company hopes doing so will help it become a household name among car enthusiasts.[3]
Business and Financials
Copart does business in the US, and started expanding rapidly in the UK in 2007. By 2008, the UK accounted for 24% of the company's revenues. Copart's growth has been, and will continue to be driven largely by its international acquisitions.
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 (it got rid of its in-person sales in 2004 to improve bidding) [4]
Remarketing Services (US Business), 83% of 2009 Revenues
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). [6]
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), 17% of 2009 Revenues
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.
Copart entered the UK Market starting in late 2007 through a series of acquisitions. The UK went from 3% of the company's revenue in 2007 to 24% in 2008, and continues to be a larger part of Copart's business in 2009. This shift towards Vehicle Sales will drive down the company's gross margin, because it requires holding and maintaining inventory. [6] [1]
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. [7]
Trends and Forces
More driving, more accidents, more profits for Copart'
The volume of cars being driven in the United States as well as worldwide has increased substantially over the last several decades. 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]
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. 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.
The Dollar/Pound Exchange Rate
As of April 2009, Copart had accumulated a $41.4 million loss (about 5% of sales) because the dollar strengthened against the Canadian dollar and the Pound. [12]
While it is difficult to predict how the dollar will perform relative to the pound, the dollar has strengthened 15% from March 2009-July 2009. This shows that in the wake of worldwide stimulus spending, the market is treating the US Fed as a more trustworthy creditor than the British Fed. [13] If this trend continues, Copart's earnings will be adversely affected.
The Price per Tonne of Scrap Metal
When aluminum, metal, and copper are worth a lot, companies buy Copart vehicles at auction just to sell for scrap metal. From Summer 2007- Summer 2009, aluminum prices fell over 80%, along with other industrial metals due to weak demand for durables (cars, planes, trains, railroad tracks etc). [14] 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.[12]
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.[15]
- 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.[16]
- 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.[17]
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
- ↑ 1.0 1.1 [ http://www.sec.gov/Archives/edgar/data/900075/000110465909037456/a09-15254_110q.htm | CPRT 10Q, p.16]
- ↑ Earnings Problems, MSN
- ↑ Sponsorship, Business Wire
- ↑ [CPRT 2007 10-K, Page 4
- ↑ Markets Earning Analysis
- ↑ 6.0 6.1 The Copart 2008 Annual Report, p. 37
- ↑ |Copart Competitiveness
- ↑ US Department of Transportation Federal Highway Administration
- ↑ "Cheap Cars in China, Expensive Gas Everywhere, February 19, 2008
- ↑ CPRT 2007 10-K, Page 7
- ↑ CCC Information Services Inc.
- ↑ 12.0 12.1 | Copart 2009 Quarterly Report
- ↑ | Dollar vs. Pound, Seeking Alpha
- ↑ |Falling metal prices
- ↑ Adesa Company Overview
- ↑ About Manheim
- ↑ RBC Initiating Coverage, CPRT, December 14, 2007
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