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Copart Deep Dive: Impenetrable Moat And Growth

Dec. 29, 2022 12:07 PM ETCopart, Inc. (CPRT)RBA, RBA:CA36 Comments


  • Copart is insulated from the short-term negative headlines in the automotive sector with long-term tailwinds in the insurance salvage business.
  • Domestic dominance will be translated internationally as demonstrated by the insurer receptiveness and growth in Germany and the UK.
  • Several lasting, structural advantages over the company's only sizable domestic competitor are leading to accelerating market share gains.
  • Insurmountable and growing barriers to entry with significant insurer contract stickiness will contribute to setting Copart's dominance in stone.

Auction lot on car distributed in used cars terminal parked

photovs/iStock via Getty Images

Copart (NASDAQ:CPRT) has a moat like no other that only becomes more impenetrable with time. Their only large domestic competitor, IAA (IAA), is only bound to lose market share, and so are smaller domestic

This article was written by

Value-Focused equity research in long-only opportunities. Most experienced in TMT but sector agnostic. While finding true value in mispriced securities is what I look for most, wide moats can sometime provide more confidence than discounted valuations. I broadly focus on what falls between these two categories.

Analyst’s 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.

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Comments (36)

I made good money from this article. Very well articulated, straight-forward pick on a company I can wrap my head around with just good old fundamentals, not microchips that will take over the world.
Obelisk Investment Research profile picture
@BklynDave1 Great to hear I helped you on this pick! Understandable companies are a definite must, if they're not there's no value in our assumptions, even if the outcome turns in our favor, have to keep process and outcome separated!
@Obelisk Investment Research What is the source of # of buyers for Copart and IAA? Same for number of contracts and estimated ASP. Valuable info, good DD.
Obelisk Investment Research profile picture
@Stratocaster17 for the number of buyers its from the following interview with co-CEO Jay Adair: www.investors.com/... (it's from 2020 so we can assume it has grown since then, there may be an updated figure but I haven't come across it). For IAA I had trouble finding the source so I dug again and actually found a 100k estimate in the following slide deck for the RBA acquisition, much lower than the 300k figure www.sec.gov/... ASP/Number of contracts are not officially disclosed figures, so once again estimates pulled from others, including expert calls, and a lot of activist investor presentations, I recommend you look at activist investor presentations from Luxor, Ancora, Discerne.
Luxor is especially supportive of my claims www.globenewswire.com/... www.globenewswire.com/...
Ancora "fought back" and issued a response in favor of the deal, read to see the flipside: www.businesswire.com/...
This was a very interesting development that, although the deal closed, confirmed my through that a significant amount of shareholders wouldn't like this deal. Thanks again for reading
@Obelisk Investment Research very well written article. You articulate your thesis well. Thank you.

I understand CPRT has some structural advantages vs IAA. Can IAA offer insurance companies more attractive share of vehicle's price? What is Copart/IAA take of revenues from vehicle auction? Do you know the volume of vehicles auctioned in a year? Looking at Copart's website, there is lot of cars being auctioned for very low prices (think $500-2000). How is it economical for insurance companies to pay towing and auction fees to Copart with such low prices?
Obelisk Investment Research profile picture
@Stratocaster17 Thanks for reading. Those are great questions I considered, but the specific pricing dynamic is not something that I saw discussed. What I assume is that IAA's ability to reduce its fees is strained by its lease cost structure, and as discussed large insurers are not only slow to move, they care about reliability of service, speed of service, and realized revenue. While lowering prices could help with the last of the three, I think GEICO's switch from IAA showed how important the reliability was, and so I doubt that even if IAA could reduce its prices to a more relatively attractive level, that itself would not change the fundamental competitive dynamic drivers that I outlined (larger buyer network, better land positioning, CAT preparedness, etc.)
For the number of vehicles, that is not ever discussed explicitly by any of the two. I personally used a handful of data points from discussions with funds and some activist presentations (one large shareholder of RBA if I recall correctly had some figures but as with all others they're in terms of market share, not vehicles sold, so you can back out the insurance vehicles but not much more, and with uncertainty).
And in terms of auction prices, the low price is not a problem; you would expect these prices for older salvage vehicles, which still dominate Copart's inventory. The market price is similar for IAA's salvage, and the difference could simply be due to Copart being more exposed to insurers with different fleets (older/cheaper). But I wouldn't worry with that factor, the difference in fleet sold is not something I consider material.
For the economial question, it remains economical because the towing fees are not charged to the insurer, it is borne by Copart. Look at the last figure which includes a sample revenue/cost build.
Steffen Jørgensen profile picture
@Obelisk Investment Research ~300m vehicles on the road in the US, ~40m traded annually in the market, 19m new vehicles annually, 13m go out of service annually, 6m of these 13m vehicles are salvaged annually while the rest just go out of service outside of insurers touch. Source is an old IAA presentation. Copart is then 2-3m units of the market, IAA the remainder, although a very few small independents also process some volume
@Obelisk Investment Research
Thank you for replying Obelisk. In the meantime I did find the number of cars sold annually, 3.5m for Copart , 2m for IAA for 2022. They do disclose this in their ESG reports (for Copart it's titled "Leading with Sustainable
Growth" dated 26.10.2022, page 5). This would imply ~$1000/car in revenue. This is kind of skewed, as vehicle sales are reported gross.

Regarding the towing expense, are you sure that Copart bears the cost? I though the process works like this:

car gets into accident => it gets towed to insurance agent for inspection, who decides it's more economical to total it => Copart gets the car and brings it to its yard and prepares it for sale (photos, etc). For this service Copart (usually) has to pay 3rd party towing and collects fixed payment from insurance company => Copart sells the car and gets % of the selling price. The rest is sent to insurance company.

Does it sound about right?
RB Equity profile picture
Great write up. Thanks.
Self driving is the only real risk I see here. There will always be some volume from cat, and fleet penetration will take years. However, at 30 p/e there is room for lower multiples if and when technology becomes commercial. Any thoughts?
Obelisk Investment Research profile picture
@RB Equity Thanks for reading! I agree that at the current multiple the window of opportunity is much smaller, I think there is no doubt that in 10 years ADAS will be ubiquitous enough to be a headwind, overpowering the increased repair cost tailwind that comes with it. I wouldn't be able to say definitively how Copart will do in such an environment but it remains the largest (and from my point of view) only large uncertainty factor. There's no doubt that Copart dealer services will drive volume and that insurance volume will not be null, the main factors I would monitor are 1) The volume Copart processes 2) The competitive dynamics changing as non-insurance become more of a focus and it becomes closer to non-salvage marketplaces 3) The traffic on its auctions, and how a reduction would affect the momentum of its buyer/seller network effect/ the value of its auction platform. There's a lot of factors related to corporate strategy that will affect all of the above, so I wouldn't put much weight on any definitive prediction as of now.
IAA isnt going anywhere. Copart might be efficient on getting cars ready for sale, but they are horrible on the buyer side of things. Their revenue will level off because buyers are tired of their constant raising fees, shortening of storage times, arrogant yard managers who ignore buyer issues, long wait times for loading and customer service. When they place all their emphasis on stockholders instead of customers you can mark my words that a revolt is coming. A self correction if you will, because if they keep raising fees buyers will simply bid less- and insurers won't be happy with a smaller sale price while copart tries to gorge or greed. People don't have to buy from copart and have other options- and IAA is a way better one.
Obelisk Investment Research profile picture
@copartsucks, Fair worry, I checked the BBB for both; Copart has had ~2x the number of complaints over the last 3 years. Given that Copart's unit volumes are ~60% larger than IAA's and that it has segments like dealer services to help dealers sell non-totalled vehicles more suited to the individual domestic customers (whereas IAA hasn't and won't soon due to the non-compete cited above), I don't see this as a worrisome difference in satisfaction. The fact that more individual customers buy from them shadows the BBB difference. I see from your name and previous comments that you're not a fan of Copart, which is fine, but they've been around for decades under nearly the same management; if their culture was based on greed and conniving, their fall from grace wouldn't have waited until now. If I have to bet on IAA or Copart, the choice is simple. Thanks for the comment.
gritty profile picture
Thank you Saguaro capital. Excellent and informative write-up on CPRT.
How is the business affected by the growth in EV vehicles? They have a lot fewer parts than ICE vehicles.
Steffen Jørgensen profile picture
@rsaler EV's are fantastic for Copart. Higher ASP's, very expensive repair, so they will increase the total loss rate

Btw very nice write up, thanks
Obelisk Investment Research profile picture
@Steffen Jørgensen Agreed, EV adoption will amplify the TLR's increasing trend due to repair complexity (different technicians, tools, and training required) and possibly increase salvage values if electric powertrain components are more valuable than for ICE, holding all else equal. Thanks for reading!
Heavy Moat Investments profile picture
Excellent article, about IAA acquisition, I believe that no matter if it goes through or not, it will be an irritation for IAA making them less efficient. There are no clear synergies in the deal, the only beneficiaries are copart and Richie. Followed!
Obelisk Investment Research profile picture
@Heavy Moat Investments Definitely agree, the market seems to think so too as per share price reaction and the few RBA institutional investors I've talked to as well as the letters I've included in the article echo this sentiment. I've been following your articles as well, much appreciated!
You might want to avoid. I'll be filing a suit in the not too distant future
Excellent article about an excellent investment.
Obelisk Investment Research profile picture
@maphead Glad you enjoyed the read
Three Wood Capital profile picture
Nice write up. Hoping to buy this company in the new year.
Obelisk Investment Research profile picture
Thanks, persisting negative auto sentiment could definitely create even better opportunities, I'll likely put out a more quantitative piece based on the above soon
i've owned cprt for a long time-primarily because of the incentive compensation you mentioned.
johnson and adair own a combined 10% of the company and it's always nice to be on the same
side as a shareholder.
I want to know what are Adair's plans
Obelisk Investment Research profile picture
I wouldn't be too worried, as I briefly touched on Copart's corporate and buiness-level structure is strong and Jay's been with the company for decades and even as he is likely on his way out (Jeff Liaw would assume the full CEO role) I personally have full confidence in management, but I agree this coming transition will be especially important to monitor strategy and culture-wise
@Saguaro Capital but there is not any information that Jay is leaving right? They never adressed it on calls or anywhere. They only commented promotion and nothing about Adairs future. Or did I miss something?
Obelisk Investment Research profile picture
@adosko6 This co-CEO structure is what Willis Johnson (Founder and former CEO) did with Jay Adair before he left the company, although less formally defined. In Willis Johnson's biography (From Junk to Gold) he describes how before he stepped down he took Jay with him everywhere as if they were both CEOs to ensure a smooth transition, so that he was aware of everything. As Jay becomes a bit more hands-off (not on the latest earnings calls), I understand this to be the similar transition period. You're right that they haven't formally announced that Jeff Liaw will eventually take on the full role, probably because of timing uncertainties and the need to ensure he's the right replacement.
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