When I first wrote about Copart (CPRT) in mid-2017, shares traded hands for around $30. I have continued adding to my position on major dips, most recently during the market crash in March. More than three years later, with the stock closing in on four-bagger status at $114, I would like to take a moment to review why Copart remains a stock to hold forever.
Copart and the Pandemic
As a major player in the automotive repair and transportation infrastructure industries, Copart is considered an “essential business.” The company did not shut down operations during the pandemic. Unlike some competitors, Copart’s auctions have taken place entirely online since 2003. Although difficult to quantify, management believes that “surely it has enhanced our value proposition.”
In the last five months of Copart’s fiscal year, which ended July 31, the company saw a significant decline in assignments and units sold. In April, assignments were off 37 percent, while units sold were down 16 percent, although management stated that August’s numbers were up year over year. The decline was driven by a sharp reduction in vehicle miles driven during the pandemic as motorists spent more time at home.
Despite these challenges, earnings in the fourth quarter were buoyed by a 26 percent increase in vehicle selling prices. In an unexpected twist, used car prices have soared during the pandemic. Amid widespread fear of ride-sharing and public transport, consumer demand for vehicles has surged. At the same time, new vehicle inventory remains tight due to factory shutdowns. Low interest rates have also added even more fuel to the fire. Edmunds reported that sales of used cars and trucks were up 22 percent in June over the prior year, an increase unheard of since 2007.
As a result, Copart generated record sales and earnings for FY 2020. Revenue increased 8 percent YoY to $2.2 billion, while net income went up 18 percent to $700 million. Earnings per share have risen from $1.72 in 2017, when I first wrote about the company, to $3.00 today.
In some respects, Copart’s financial results are trailing indicators. As noted in the annual report, because the company does not recognize the majority of revenues until auctions are completed, “a substantial portion of the declines in assignments… will be reflected in future quarters.” But there is no doubt that the underlying business model remains viable.
As I have argued for years, Copart is, perhaps, the ultimate example of an ideal business. The salvage vehicle industry in the U.S. is a duopoly with two major players, Copart and Insurance Auto Auctions (IAA), controlling 80 percent of the market. Much of Copart’s sales consist of repeat business from major insurance companies. With total loss frequency on the rise, there is no shortage of salvage vehicles. Due to regulation and the logistical complexity of the salvage industry, barriers to entry are high.
Copart possesses a long track record of completing tuck-in acquisitions in Europe and around the world, buying up smaller auctioneers and folding their business into the Copart system. Management possesses deep experience, and their interests are aligned with shareholders. Founder and chairman Willis Johnson owns over $2 billion worth of Copart stock. CEO Jay Adair, a lifelong employee and son-in-law of Johnson who took the reins in 2010, also owes his $750+ million net worth to the company.
Since I first recommended Copart stock, revenue has increased over 50 percent to $2.2 billion, while earnings have surged 75 percent to $700 million. The company has improved on every metric of profitability. Operating margin increased from 32 percent to 37 percent even with the effects of the pandemic.
Importantly, Copart is getting more efficient even as it expands. Acquisitions and new locations aren’t masking any slowdown in growth. Here I update a chart that I created in 2017 showing how Copart’s locations have increased in productivity over time.
|Revenue||$560 million||$1.38 billion||$2.2 billion|
|Net Income||$97 million||$392 million||$700 million|
|Number of Locations||123||200||235|
|Average Revenue per Location||$4.55 million||$6.88 million||$9.36 million|
|Average Net Income per Location||$0.79 million||$1.96 million||$2.98 million|
2020 numbers obtained from July 2020 10-K
Incredibly, Copart accomplished this with little leverage, instead financing growth with cash flow. Long-term debt has actually decreased over the last few years; currently, the balance sheet shows $477 million in cash and $400 million in long-term debt.
In his book Junk to Gold (see my blog for a review), Johnson likens Copart to a utility. It certainly isn’t going anywhere. In light of recent results, it seems that Adair’s characterization of the company as “pandemic-proof” carries some weight.
At various points over the last three years, investors could have bought Copart shares on the cheap. At the time I first wrote about the stock, it was valued at around 18 times earnings. Today, at 38 times earnings, the market seems to have finally recognized that Copart is a technology company, although the valuation remains low relative to similar firms. Indeed, the company’s decidedly unsexy business has often been overlooked by Wall Street, which may explain the valuation gap.
As much as I love Copart, I wouldn’t want to overpay for the stock. I added to my position during the March market crash, although I wouldn’t be a buyer right now. Instead, I will simply hold Copart stock indefinitely.
Disclosure: I am/we are long CPRT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.