Copart: Another Beneficiary of Cash for Clunkers

Company Description: Copart, Inc. (CPRT) provides vehicle suppliers, primarily insurance companies, with a variety of services to process and sell salvage vehicles through auctions. Salvaged vehicles are primarily sold to licensed dismantlers, rebuilders, and used vehicle dealers.

We perceive Copart to be second in line to benefit from the “Cash for Clunkers” bill as we see auto dealerships as the initial beneficiary. One of the underlying purposes of this bill is to increase fuel consumption and as the “clunkers” are literally pushed into dealerships to be exchanged for more fuel efficient vehicles, the old vehicle will have to go somewhere. According to the bill many of the parts such as the engine should be destroyed or recycled to prevent the out of date vehicle returning to the road. Copart will be a viable option for dealers to turn to in order to sell these broken down vehicles to the various used parts suppliers, scrap metal recyclers and salvage yards.

Copart has been growing rather steadily since its inception in 1982 now operating 140 facilities throughout the US, Canada and the United Kingdom. It has over 50,000 vehicles for bidding each day ranging from classic cars, motorcycles, jet skis, boats, and used cars. Most of the revenue that Copart brings in is received from fees paid by vehicle sellers and buyers as well as related fees for towing and storage of said vehicles. Copart acts similar to eBay (EBAY) to insurance companies, vehicle dismantlers, dealers, and recyclers on both the buy and sell side for used, damaged and vehicles not economically repairable. As a second source of revenue the company has the ability to purchase vehicles outright from the various outlets and sell them for a profit through there various auctions.

Copart is a beneficiary of the “Cash for Clunkers” bill as the revenue stream should be generated through the high volume of salvage vehicles moving into retail car dealerships inventories. If we begin to see new car sales pick up amongst the new car dealers then Copart should see a direct correlation of increased revenue based on the movement of the trade in vehicles.

Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

Comments

[Mark Bern:]

Yes. Copart could benefit in the short term for as long as the program continues. If Congress ends the program by year end, though, as seems to be the current plan, then future revenues may fall off a cliff. The problem is that as people trade in cars for new vehicle earlier than they otherwise would have, it just pulls potential business from the future into the present. Now, a dip at program's end is only temporary also, but it would seem to me that it could present a better buying opportunity unless you're just trading short-term.

Those iinvestors who look to forward earnings may take profits before the dip, just in case, making a dip more likely. All in all, not a bad short-term trading idea if it hasn't already run up.

Aug 10 01:39 PM

[Mad Hedge F...:]

xdfg. So now we have euthanasia for cars. The Wall Street Journal tells us that a government condition of the Cash for Clunkers program (see my last report atwww.madhedgefundtrad... ) is that clunke r buyers total the engines by pouring sodium silicate into them. That waythey can’t be resurrected like Frankenstein at the junkyard. What’s next? Free Viagra for the high mileage, new car buyers? There’s acertain poetic resonance there. Anything that works. In the meantime,the Republican Party is publicly slashing its wrists by trying to block an expansion of the most popular program since the end of the mandatory draft. Is Mc Cain trying to lose the election a second time? I think he is oblivious of the warm and fuzzy feelings the clunker clensing is generating, which is far more valuable than any direct economic impact. Don’t they have Ford dealers in Arizona? Doesn't he know that the Ford Focus is the biggest selling car in the program? I never thought I’d run a car company chart again, but here is Ford in all its glory, up a mind boggling 65% since Cash for Clunkers started. Like virginity,confidence is very hard to recover, once it is lost.

Aug 10 02:12 PM

[Jolly_Rancher:]

I wonder if TAL, the shipping container company, might benefit. All of that scrap, some 750,000 engines and transmissions worth, will be shipped to China for recycling in, I presume, shipping containers.

Aug 10 10:06 PM

[Bottom Up I...:]

Its not a bad thought, but the Company addressed the possible benefit in the last conference call. They say cash for clunkers is a non-issue. Maybe LKQX might be a better play on this?

From their Q3 09 Conf. Call:

Obviously, if we try to sell something, and then the buyer of that vehicle knows they cannot put it back on or it has to be junked, but even worse, they cannot sell any running gear of that vehicle, they’re just not going to pay anything for it.

So it’s a – definitely a no-effect for Copart. We’re looking at this as minimal, if anything positive impact. Obviously no negative impact that we can see, because it’s just a – it’s an irrelevant amount of vehicles. I mean, you’re talking about 1 million vehicles, and by the time they go through the chain, it would be something much smaller than that and over the time period and by the time you factor in that the vehicles, are going to sell for basically no value. I mean our guess is they’d be 50 or $100 vehicles.

Aug 11 10:20 AM