Copart: One Of Its Kind

Sep. 18, 2021 7:15 AM ETCopart, Inc. (CPRT)22 Comments
Cappuccino Finance profile picture
Cappuccino Finance
2.93K Followers

Summary

  • Unique business model of CPRT provides great profitability with an economic moat.
  • Gross profit margin (53.63%), EBITDA margin (46.74%), and net income margin (34.78%) far exceed sector median.
  • All growth metrics (YoY EBITDA growth at 38.73%, YoY EBIT growth at 38.25%, and YoY growth at 33.11%) are strong.
  • I believe the market is undervaluing the economic moat and revenue growth potential of CPRT.

Frustrated woman crouches next to wrecked car after a car accident
LordHenriVoton/E+ via Getty Images

Investment Thesis

Copart (NASDAQ:CPRT) is a leading provider of online auctions and vehicle remarketing services in 11 different countries. Through their patented platform, their site auctions used cars that are salvage titled, damaged, or rebuilt. I believe CPRT presents a great investment opportunity because:

  1. Unique business model provides great profitability with an economic moat.
  2. CPRT shows strong revenue growth and a bright future outlook
  3. Their management team shows a track record of financial discipline

Very profitable and unique business model

CPRT has a very unique business model with two approaches for listing vehicles. They may directly purchase cars damaged by accidents or natural disasters and then sell the vehicle through the platform. Alternatively, they provide auction services for insurance companies, financial institutions or individuals to sell vehicles on their behalf. On the purchasing side, most buyers are licensed vehicle dismantlers, rebuilders, repair licensees, or used car dealers. CPRT has indirect competitors such as eBay Motors (EBAY), KAR Global (KAR), or CarMax (KMX), but CPRT is literally one of its kind. There are no direct competitors who focus exclusively on damaged cars. This is a unique business model, and being one of the largest online auction sites provides a great economic moat for CPRT. I believe the market is undervaluing this economic moat. A snapshot of the company website and vehicle inventory is shown below.

Graphical user interface Description automatically generated

Source: Image captured from the inventory section of their website

Profitability is outstanding across the board. Gross profit margin (53.63%), EBITDA margin (46.74%), and net income margin (34.78%) far exceed sector median. Furthermore, profitability has been steadily increasing over the past five years as demonstrated by historical EBITDA Margin in the graph. I choose eBay, Car Max, and KAR Auction Services for comparison, as these also offer online car purchases/auctions. However, as already mentioned, there is really no direct competitor.

Source: Graph generated by author using data from Seeking Alpha

Strong revenue growth and a bright outlook

CPRT’s revenue has been growing at an impressive rate of 14.61% on average in the past 5 years, and last quarter’s YoY revenue growth number came in at 22.08%. All other growth metrics (YoY EBITDA growth at 38.73%, YoY EBIT growth at 38.25%, and YoY growth at 33.11%) are strong as well. The following graph shows the impressive revenue growth of CPRT over the past 5 years.

Chart, bar chart Description automatically generated

Source: Graph generated by author using data from Seeking Alpha

I believe this revenue growth will continue into the foreseeable future and possibly accelerate because of the 1) increasing technological complexity of new cars, 2) increasing labor costs, and 3) auto part shortages are causing insurance companies to designate cars as totaled with greater frequency. As I mentioned before, the insurance companies are the primary supplier of cars to CPRT, so this will create a plentiful supply of cars and push CPRT revenue/earnings upward. Therefore, I adjust the revenue growth expectation to 20-25% YoY in line with that of the most recent quarter, instead of the historical level of 15%. Demand drivers for salvaged cars are shown below.

Text, letter Description automatically generated

Source: Slide from CPRT investor presentation

Strong balance sheet and track-record of financial discipline

CPRT is sitting on a pile of cash at this point. CPRT’s net debt has been steadily decreasing since 2016, to its current level of -$530.2 M, which means they have more cash & equivalents than total debt. Not surprisingly, their current ratio is at 3.8 (industry average: 1.5), and quick ratio is at 3.7 (industry average: 1.4). These strong balance sheet and the consistent year-over-year improvement demonstrate the 1) cash generation ability of the business, 2) quality of the management, and 3) economic moat surrounding CPRT's business model. With this strong balance sheet and a pile of cash, CPRT has a comfortable cushion to acquire key business investments, develop or improve their platform, and assist them through an economic downturn. The graph shown below demonstrate Net Debt and Cash & Equivalent trends since 2016.

Source: Image created by author with data from Seeking Alpha

Intrinsic Value Estimation

I used DCF model to estimate the intrinsic value of CPRT. For the estimation, I utilized EBITDA ($1.26 B) as a cash flow proxy and current WACC of 7.9% as the discount rate. For the base case, I assumed EBITDA growth of 20% (current seeking alpha estimate) for the next 5 years (zero-growth for the terminal value). For the bullish case and very bullish case, I assumed EBITDA growth of 30% and 35%, respectively. I believe the EBITDA growth of 30% or 35% are certainly achievable given the increasing auto repair costs and higher frequency of insurance company to designate the car as totaled. I believe the international expansion of CPRT (current serving 11 countries) will also positively impact the revenue/earnings growth trends.

The estimation revealed that the intrinsic value of CPRT for the bullish and very bullish cases are $187.99 (23% upside) and $223.24 (47% upside), respectively. If they execute the international expansion plan successfully and maintain strong relationships with insurance companies, I believe this number is very reachable. Given their strong balance sheet, they shouldn’t have any problem executing the expansion plan or cultivating business relations in new markets.

Price Target

Upside

Base Case

$131.45

-14%

Bullish Case

$187.99

23%

Very Bullish Case

$223.24

47%

The assumptions and data used for the price target estimation are summarized below:

  • WACC: 7.9%
  • EBITDA Growth Rate: 20% (base case), 30% (bullish case), 35% (very bullish case)
  • Current EBITDA: $1.26 B
  • Current Stock Price: $152.3 (09/16/2021)
  • Tax rate: 20%

Risks

The current home office trend may reduce the driving rate, which may translate into lower CPRT revenue due to fewer accidents and lower auto repair costs. However, monthly vehicle mileage has been trending upward since early 2021, and is now within 5% of the pre-pandemic peak (292,856 miles in 2019). It is not clear what long term impact the shift towards working from home will have on driving. Remote work means less commuting, but also allows relocation from urban to rural centers where driving is a necessity.

Chart, line chart, histogram Description automatically generated

Source: Image created by author using data from YCharts

Technological development (e.g. ABS, collision warnings, and lane assistance) may decrease accident rates, which may challenge the business model in the long term. However, as I mentioned before, as cars include more sophisticated technology, repair costs dramatically increase. We expect technological development to decrease the accident rates on the road, but increase repair costs when an accident does occur. CPRT may still see a net benefit in revenue as insurance companies are less willing to cover expensive repair costs.

Conclusion

I believe that CPRT presents an interesting and great investment opportunity for the growth oriented investor. Its unique business model provides an economic moat for the company, and the revenue growth and profitability that CPRT has achieved are truly impressive. I believe their revenue growth will continue or accelerate in the near future, and this presents an upside of 20-40% from the current price level. While the pandemic temporarily decreased driving mileage, driving rates have been increasing towards pre-pandemic levels. I believe it will continue to do so. As car manufacturers incorporate increasingly sophisticated sensor technology, this will have two opposing effects on CPRT revenue. The technology should reduce the number of accidents, but this will be offset by an increase in repair costs for damaged cars. In the near term, I believe the higher repair costs will benefit CPRT.

This article was written by

Cappuccino Finance profile picture
2.93K Followers
Visit me at Cappuccino Finance, I share my top picks (Value, Growth, Dividend & Growth), market outlook, and interesting ideas from super investors, based on my 12 years of experience and knowledge in stock investment and in real estate. I, Justin J. Lee, believe in fundamental analysis and disciplined market research. I have strong quant background with a Ph.D. (University of California, Santa Barbara) in model predictive control and an MBA (Jones School of Business, Rice University). My primary focus is to identify 1) small cap companies with strong fundamentals and growth potential, 2) large cap companies going through temporary set-backs, and 3) stable companies with solid dividend yields and growth potential.

Disclosure: I/we have a beneficial long position in the shares of CPRT either through stock ownership, options, or other derivatives. 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.

Recommended For You

Comments (22)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.