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Larry Meyers, PDL Capital (76 clicks)
Value, special situations, long-term horizon, small-cap
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Ben Franklin is famous for saying, "Nothing is certain but death and taxes." Had the automobile existed back then, I'm sure he'd have added, "and car accidents." Because I don't know anyone who hasn't had at least one car crash, or had an "act of God" wash their vehicle away in a monster storm.

Fortunately, public companies that take advantage of these unfortunate eventualities make it possible to profit from misfortune. The well-known opportunities are insurers like Allstate (ALL) and Progressive (PGR). These are very attractive businesses because they have long operating histories, and it indicates smarts with regards to underwriting. The key to understanding them, however, is not their P&L statements so much as their cash flow statements. Both of these companies generate billions in annual free cash flow, even during the recession. They are solid, healthy companies that pay a dividend, and are diversified across areas besides automobiles.

However, I prefer the pure play in automobiles that doesn't rely on insurance premiums. A company called Copart, Inc. (CPRT) takes totaled cars, salvages them, auctions them and then makes a big profit. It doesn’t only service people like you and me, but also insurance companies, banks, charities, car dealerships, fleet operators and vehicle rental companies. The company doesn't restrict itself to car crash remnants, either. Folks who received insurance payouts related to an auto theft have been made whole, but if the cops recover the auto, the insurance company is left with a car it doesn't want. So it sells it to Copart, which auctions it off. Think of it as the Island of Misfit Autos.

The internet has streamlined Copart's entire operation, as it can know conduct auctions online, eliminating enormous expenses. If you think a natural extension of this model is for Copart to become a used-car auction marketplace, you'd be right. It does that, too. Even better, Copart has become the master of this space. The company handles everything for buyers and sellers, such as a salvage estimation service, insurance company repair estimates, transport services, vehicle inspection stations, on-demand reporting, DMV processing and a part search service.

Copart does have competition, as the market is heavily fragmented in this space. But it is quickly becoming the 800-pound gorilla. It's always possible that a major auto manufacturer can jump into this space, but the barrier to entry is getting higher and it does require a given expertise. With many little independent operators like Copart, I would expect consolidation in the sector once organic growth stalls out at Copart. Revenue has started to slow after years of turbocharged growth.

The amazing thing about Copart is that until last year, it had run for six years without incurring any debt. It did take on $350 million last year, but it churns out tons of free cash flow, so debt service is not a concern. The credit facilities permit repurchases of stock, capital expenditures, permitted acquisitions, working capital and other general corporate purposes. We've seen Copart repurchase almost 8% of its stock in the past year, and I would expect acquisitions going forward.

How is this actionable?

Copart trades at a 21 P/E on 2011 earnings, with 5 year annual growth rate estimated at 14.38%. So it is more expensive on a P/E basis than I'd like. But several factors exist that give me reason to buy. The company has extraordinary net profit margins (19%), plenty of cash on hand, 14% insider ownership, smart management, and it dominates the sector. All together, that tells me it's a buy, and I prefer this stock over the insurers.

Source: Copart Turns Car Crashes Into Cash