Copart Inc.: Under The Radar Name For 2017

| About: Copart, Inc. (CPRT)


Average age for cars on the road in the U.S. is at 11.5 years and the average years will continue to rise.

This increase comes amidst an increase in car demand and a reduction in political uncertainty.

These tailwinds unlocked hidden stocks that are under-followed but their services needed by the public.

These are the companies that make money from selling old, new and damaged cars to global markets.

One such company with a portfolio of tailwinds moving into 2017 is Copart's Inc.

Thesis summary

Copart's (NASDAQ:CPRT) recent international expansion for 2017 and beyond shows great momentum. It will be a great source of revenue for the company moving forward. Copart recently expanded into Europe, Brazil, the Middle East, and India. This exposes them to currency fluctuation pressure, challenges of being a new entrant and political/policy related risks. Moreover, operations and acquisitions in certain foreign areas expose Copart to political, regulatory, economic, and reputational risks.

However, global expansion will be the next growth frontier for Copart. It expands their market and allows them to profit from their proprietary rights in technology in new markets.

It is also likely to experience tremendous success in emerging markets such as Brazil and India, because they do not have superior roads as compared to countries like the U.S. Poor infrastructure reduces the lifespan of a car and creates a huge market for car spare parts.

Furthermore, Copart will manage to double its seasonality advantage. In Copart's recent annual report, the company acknowledged that during the winter weather, Copart "tends to have higher demand for our services because there are more weather-related accidents." Meaning that Copart is likely to see a surge in demand for its first quarter of 2017.

Copart's success in global markets is also related to seasonality. It implies that Copart's revenues will be less dependent on seasons, since the northern and southern hemispheres always experience opposite seasons. Because whenever one hemisphere is exposed to the rays of the sun the other is not and this exposure alternatives as the Earth revolves in its orbit, implying that the Winter catalyst Copart has in the U.S., will occur twice than once a year.

In addition, because of Copart's earnings strength and positive price movement, it is likely to see a surge in demand from aging cars, more stock price appreciation from its global expansion and positive start to 2017 due to the Winter catalyst.

The aging cars

In the last 10-years, Copart's growth has emerged from an increase in the age of the fleet of cars on the road from 7.5 years to 11.5 years.

A new IHS survey suggests that the average car on the road in the United States is 11.5 years old. This is in spite of the fact that Americans are buying cars at an annualized rate of more than 17 million vehicles, marking a record annual sales number since before the Great Recession.

This means that car owners are keeping their old cars for longer periods and together with the new cars that they buy.

Here is more interesting information. IHS projected that the number of vehicles that are older than 12-years will rise by 15% over the next five years.

Furthermore, the number of vehicles that are 16 to 24 years old is 44 million. Which IHS reports is 26 million higher than in 2002. Also, the number of vehicles on the road that are at least 25-years old is 14 million, up by 8 million since 2002.

As the number of old cars on the road increases, a great buying opportunity in a sector that is less followed, is born.

Think about independent vehicle repair shops and how their business will grow as the number of old cars on the road continue to increase. In addition, as the average years of cars on the road increase by 15% in the next 5-years, more car owners will have to take their cars for maintenance, new parts and repairs at car dealer shops.

Name to remember

Copart Inc. is a provider of online auctions and vehicle remarketing service in the U.S., Canada, the U.K., the United Rab Emirates, Oman, Bahrain, Brazil, Ireland, Spain, and India.

Copart provides vehicle sellers with services to process and sell vehicles primarily over the Internet through its Virtual Bidding Third Generation Internet auction-style sales technology.

The company primarily gets its business through insurance companies by selling off damaged cars to parts dealers and recyclers. Simply put, your damaged, used or smashed car is gold to Copart. The company sells the vehicles to vehicle dismantlers, rebuilders, repair licenses, used vehicle dealers, exporters and the general public.

Earnings strength

The upward trend in the EPS graph for Copart's below shows that the company has experienced earnings growth in the last 4-years. EPS grew from $1.42 to $2.36 by September of 2016.

(Source: Authors analysis with data derived from Morningstar)

2017 is looking promising as the trailing twelve month EPS is already projected at $3.4, up 44% from its September EPS numbers.

Historically, the growth of earnings per share is an important factor in determining both the company's future earnings performance and in driving a company's stock price performance.

Looking at Copart's data from 2012-2016, you notice the consistent growth in EPS. Copart's EPS is not only growing in absolute numbers but in percentage terms as well.

(Source: Authors analysis with data derived from Morningstar)

Copart's EPS growth rate does not seem to be decelerating. This is an indication of strength that could lead to earnings acceleration for Copart's earnings in the long term as Copart continues its global expansion, earnings growth and average age of cars on the road continues to rise.

Price movements

In the last 5-years, Copart's stock price has increased by ~130%. This great historical stock performance should lead to above average price performance for Copart's in the next few months of 2017.

(Copart, Inc. Interactive Stock Chart)

Copart Headwinds

Powered in part by an impressive quarter, a surge in car demands and an increase in the average number of years for cars on the road, Copart has seen its stock price increase more than the S&P 500 Index (.INX) in the last 12-months as shown in the graph taken from Google Finance below.

Copart's stock price has grown by ~45% in the last 12-months, outperforming the rise in the S&P 500 Index during the same period.

Therefore, there is a chance that Copart will participate in a market correction, should there be one, next year.

Besides, Copart's trailing twelve months levered free cash flow is -$34.19 million. This shows that after Copart's covers all its financial obligations, its free cash flow is negative. This implies a weak cash flow for the firm and limits the company from acquiring debt for growth purposes without its credit ratings going downhill.

Copart's conclusion

The future looks promising for Copart. Its recent global expansion initiatives have potential to increase Copart's sales. The average age of cars on the road from 2017 and beyond will help increase demand for Copart's services.

In addition, new technology innovations such as mobile entertainments, wearables, car entertainments have the potential to increase accident frequency and severity, encourage bad driving habits and increase car repair costs. Factors detrimental to society but tailwinds to Copart.

Copart's strengths can be seen in multiple areas:

Car replacement tailwind - The average car on the road in the United States is 11.5 years old. As the cars on the road get older, the demand for new cars will increase. This increase in demand also increases the need to sell old cars and that is where Copart comes in. Copart offers vehicle sellers with services to process and sell vehicles primarily over the Internet through its Virtual Bidding Third Generation Internet auction-style sales technology. Consequently, Copart will see a surge in demand for its services as the number of people replacing cars increases.

Consistent revenue growth rates - Copart has grown sales from $924 million in 2012 to $1.268 billion as of September of 2016. This 37% sales growth in the last 4-years is a good indication of how the company has managed to innovate and grow despite the headwinds the car industry has been facing.

Furthermore, Copart has shown impressive management effectiveness through its Return on Assets ("ROA") and Return on Equity ("ROE"). Copart has a trailing twelve month ("ttm") ROA of 14.65% and ROE of 42.22% respectively. This is a signal of strength for the company and an encouraging message for its shareholders. It means that for every $1 shareholders invested in Copart in the last 12-months, Copart has been able to make $0.42 in profit for its shareholders.

The majority of Copart's vehicles are sold on behalf of insurance companies and are usually vehicles involved in an accident. Copart sells these vehicles to vehicle dismantlers, rebuilders, repair licenses, used vehicle dealers, exporters and the public. This means that as long as people continue to be in accidents, Copart will have business. As long as people continue to buy new cars and sell their old ones, Copart will have business. As long as people continue to sell and buy more cars online, Copart will have business. Copart is a simple company offering services that people need and will continue to desire for generations. Simply put, Copart is a novel business idea with great upside potential for its investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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