Copart (NASDAQ:CPRT) is a major provider of online auctions and vehicle remarketing services in USA, UK and Canada. The company serves as an agent to process and sell used vehicles over the internet using auctions. In the UK, in addition to acting as an agent, Copart also buys the used vehicles outright and sells them to interested parties. The company primarily deals with insurance companies helping them dispose damaged vehicles which cannot be economically repaired.
The company has a history of growing by acquisitions. During the last 3 years, the company acquired 14 facilities and was successfully able to launch operations in the UK. As of July 31, 2010, Copart had 134 facilities in the US, 2 facilities in Canada and 16 facilities in the UK.
On September 22, 2010, the company reported an EPS of $1.78 for financial year 2010 missing analyst estimates. The analysts on average were expecting the company to report an EPS of $1.83. Although used car prices were up, higher administrative, sponsorship and salary costs, and exchange rate fluctuations between the British Pound and US Dollar were responsible for the disappointing earnings.
In this article, I will attempt to determine the fair value of Copart stock.
Company Financials and Valuation
At the end of financial year 2010, Copart had approximately $268 Million in cash and short term investments, no long term debt and healthy cash flows. However, key ratios such as return on equity and return on assets were below their historical averages.
Company Fundamentals/Earnings
Market Cap = $2,860 Million
Sales (TTM) = $773 Million
Income (TTM) = $152 Million
Net Profit Margin = 19.6%
Return on Equity (TTM) = 15.1%
Return on Equity (Last 5 Yrs) = 16%
Return on Assets (TTM) = 13.3%
Return on Equity (Last 5 Yrs) = 14%
Current Ratio = 4.08
TTM EPS = $1.78
Average Analyst 2011 EPS Estimate = $2.17
Average Analyst 2012 EPS Estimate = $2.52
Discounted Cash Flow Valuation
DCF valuation of Copart was performed by employing a two-stage model with a high growth period of 10 years. It should be noted that contractual obligations were treated as debt as part of this analysis. The major inputs and the valuation results are presented below. The growth rate used as part of this analysis was based on Copart’s reinvestment rate and its return on equity.
| CPRT |
High Growth Period |
|
Bottom-Up Beta for High Growth | 1.22 |
Risk Free Rate | 2.75% |
Risk Premium | 5.1% |
Cost of Capital | 9% |
Growth Rate (Years 1-5) | 10% |
Average Growth Rate (Years 6-10) | 5.6% |
|
|
Stable Growth Period |
|
Bottom-Up Beta for Stable Growth | 1.0 |
Risk Free Rate | 2.75% |
Risk Premium | 5.1% |
Cost of Capital | 7.4% |
Growth Rate | 2.75% |
|
|
Valuation |
|
Present Value of FCFF in High Growth Period (Millions) | $803.65 |
Present Value of Terminal Value of Firm (Millions) | $2,107.68 |
Cash and Marketable Assets (Millions) | $268.19 |
Total Firm Value (Millions) | $3,179.52 |
Outstanding Debt | $78.96 |
Market Value of Equity | $3,100.56 |
| |
Market Value of Equity/Share | $37 |
Relative Valuation
The estimated fair value using various relative valuation methods is presented below. It should be noted that the data from the last 4 financial years was taken in calculating the estimates shown in the table. Adjustments were made to account for outliers present in the dataset.
| CPRT | ||
Current | Estimate | Fair Value | |
P/E | 19.1 | 19.6 | $35 |
P/S | 3.70 | 4.04 | $37 |
P/FCF | 21.98 | 24.1 | $37 |
(P/E) / (P/E – Peers) | 1.0 | 0.9 | $31 |
(P/E) / (P/E – S&P 500) | 1.02 | 0.85 | $29 |
| Average | $34 | |
Fair Value
Taking an average of the estimates obtained from my DCF analysis and relative valuation, the fair value of Copart is approximately $35 a share. As of September 24, 2010, Copart was trading at $33.90 and hence appears to be fairly valued.
(Kindly use this article for information purposes only. Please consult your investment adviser before making any investment decision.)
Disclosure: None
