Copart: Making Junk Valuable

| About: Copart, Inc. (CPRT)

Copart, Inc. (NASDAQ:CPRT) takes junked cars and auctions them for insurers, auto dealers, and car rental agencies. The buyers are mostly rebuilders, licensed dismantlers, and used car dealers and exporters. They can bid in person or on Copart's online auction site (known as Virtual Bidding Second Generation, or VB2 for short). Copart also provides services such as towing and storage to buyers and other salvage companies, as well as an online database and search engine for used parts. Founded in 1982, Copart has about 120 storage facilities throughout the US and Canada.

Ever wonder what happens after cars are totaled in wrecks or natural disasters? How about stolen cars recovered "after" the insurance settlement? Some of them wind up with Copart. Then Copart turns the wrecks into profits by selling them to parts suppliers and used car dealers. This is why Car Fax is so popular. Buyers want to know if that shiny car on the lot has weathered Katrina or Rita.

Earnings are doing very well at Copart. Over the last 5 years, they've improved, on average, 23% a year. Revenues were up, on average, 16.5% a year. For the next 5 years, analysts are expecting sales to grow by 11% a year, on average, while earnings should be increasing by 14% a year.

Other numbers to consider: Return on Equity is a respectable 14%. Officers and directors own 25% of the stock while Neuberger, Berman, an investment company, owns about 11%. There is no dividend. There is also no debt on the balance sheet. The market cap is $2.7 billion with 90.6 million shares outstanding. The stock has split 3 times in the last 8 years (2 for 1 in 1999, 2 for 1 in 2000, then 3 for 2 in 2002). One valuation metric to notice: the PSR (price to sales) is a very high 6. In other words, the price you're paying for the stock is 6 times sales per share, not 6 times the profits, sales. The P/E is a hefty 23. Total revenues should be about $600 million in 2007.

There are expansion plans at Copart. Management stated that at least 6 new stores will be opened this year, though none were in the first quarter. These stores sell cars and parts. Look for some profit margin erosion due to start-up costs at these new facilities. A venture recently started was a 50% investment interest in Lanelogic, a marketer of used cars that dealers take in in trade. So far it has been a burden on earnings (loss of 2 cents in the first quarter). But this company was only started in May of last year and is expanding which has the normal start-up costs associated with it. It may be 2008 until a benefit is seen on the bottom line for this investment, but the future looks positive.

Copart has some good things going for it. It also has some valuations that are fairly high. If you want to participate in a profitable business that takes "junk" and makes it valuable, spend more time with this company to see if it might fit in your portfolio.

CPRT 1-yr chart

Disclosure: Author has no position in CPRT.