|Shares Out. (in M):||121||P/E||19.3x||14.9x|
|Market Cap (in M):||4,891||P/FCF||34.7x||16.3x|
|Net Debt (in M):||537||EBIT||402||484|
We believe that Copart offers an attractive risk-reward at current levels and is in the early stages of a sustainable multi-year acceleration in volumes, Revenue, EPS, and FCF growth.
We have followed Copart for many years and invested in the company after it announced it was tendering for ~12% of its outstanding shares (it attempted to buy back shares first this past June between $34.75 - $36.00 per share and after only filling half the tender, the company followed up with another tender this past November between $38.00 - $41.00 per share, a 14% premium at the high end relative to the first tender). Insiders, who own approximately a quarter of the company, did not tender any shares. The company has been a serial repurchaser of its stock over the last two decades as a public company and has created tremendous shareholder value, compounding at over 16% since its 1994 IPO. Copart first tendered for stock in early 2011 and the stock subsequently doubled in the following two years. We also expect strong price appreciation this time, as we discuss below.
Copart conducts auctions for totaled cars and collects fees from both buyers and sellers for its services. The company operates as the leader in the salvage auction market along with Insurance Auto Auctions, “IAA”, a subsidiary of KAR Auction Services (KAR). The salvage market is very stable and largely immune to economic impacts, growing historically in the low single digit range. The business has significant operating leverage because the majority of its costs, primarily land, are fixed. Copart does not incur inventory risk because it auctions most cars on an agency basis. This business has very high barriers to entry and is nearly impossible to recreate because of zoning and permitting restrictions. These factors allow the company to generate EBITDA margins in the 35-40% range, returns on capital of 15-20%, and significant free cash flow that has historically been used to grow the company and buy back stock.
For additional detail on the company, the salvage industry as well as industry drivers we encourage you to review Copart’s April 2016 Information Supplement (the only public presentation we’re aware of since Copart went public) or any of KAR’s Investor Presentations.
Because management does not discuss its outlook for the business in detail or provide guidance, our extensive field research has been particularly useful to help us understand the current end-markets and make a few interesting discoveries. First, Copart’s yard inventory is a leading indicator of sales and is up approximately 10% in the last year, due to rising industry volumes and a recent market share win. Two factors are driving scrap volume growth: an increase in accidents and an increase in the percentage of accidents that result in totaled vehicles. In terms of accident rates, the causes include growth in miles driven, rising average age of vehicles on the road, and more distracted drivers. As for the higher percentage of totals, the main culprit is the increasing amount of technology costs embedded in cars.
We have also discovered that Copart initiated a large price increase last summer on the buy-side of its auctions, which was the first such increase in the last 2-3 years. We estimate that this increase will add 5% to Copart’s revenue without impacting volumes, flowing straight through to the Company’s bottom line.
We believe these positive factors will lead to earnings upside over coming quarters; the first of which was already seen in the Company’s most recent quarter with an 8% top-line and 12% bottom-line beat. These beats should become more meaningful in coming quarters as Copart laps the biggest moves in the U.S. dollar and scrap metal prices last year (both of which have reduced the revenue and profitability per vehicle sold), the benefit of its recent win for the remaining ~60% of the Farmers insurance business it didn’t already have, and from additional growth as Copart adds 20%+ capacity in the U.S. over the next two years, and builds out its international footprint.
We believe that Copart can earn over $2.10 per share in FY16 ending July, or ~10% above current Street estimates, and can earn closer to $3.00 per share in FY17, or ~40% above current Street estimates.
At its current price, Copart’s stock is trading below the high end of its November 2015 tender offer and not too far off from the $35.62 exercise price of options granted to the Company’s top executives (and account for substantially all of their compensation), which we believe is a floor for the stock price. We believe that Copart is worth $60+ within two years applying an 18x multiple on FY17 EPS plus the cash generated in the interim, or ~50% upside from today’s levels.
There are a number of potential call options that could expand Copart’s business meaningfully:
Non-insurance: increased penetration of vehicles that are removed from operation but don’t make it to salvage yards
International Markets: ability for Copart to replicate North American success in other countries, namely Western Europe which could more than double volume, revenue, profitability, cash flow
Real Estate: other uses for real estate (REIT, broaden use beyond salvage, etc.)
Technology: leverage technology for other uses (i.e. Internet auction platform could be used to facilitate other kinds of auctions outside of salvage vehicles)
Continued exogenous factors like a strong U.S. Dollar and weak scrap metal prices
Irrational competitive environment – IAA attempts to undercut Copart on price
Execution risk as Copart expands internationally
Q316 results: should demonstrate another strong beat
Domestic expansion including 20 new yards and 20 expansions over the next 20 months
International expansion and scale in to new markets
Increased disclosure, more transparency
|Entry||04/06/2016 11:17 PM|
I have owned CPRT in the past, and it is one of the highest quality businesses out there. Mgmt top notch as well.
But with this multiple, are you concerned that driverless car technology will transform both this industry and the auto insurance industry in the next decade or two? Driverless technology may significantly reduce auto accidents.
|Entry||04/07/2016 01:00 PM|
This is certainly a great business but $3.00 in FY17 EPS seems awfully aggressive, nearly doubling from FY15 EPS of $1.67. Do you mind explaining your assumptions? We’re having trouble getting there. Thanks so much.
|Subject||Re: Driverless Technology|
|Entry||04/08/2016 10:38 AM|
Thanks for the question. Our research indicates that such risks are decades out and in the near to medium-term such technology will actually provide a tailwind:
· The North American Car Parc (basically all vehicles on the road) consists of 283m cars that are currently non-driverless so there’s a large addressable market with a long-runway for growth before any impact is felt
· Within the car parc, ~13m or less than 5% of the vehicles are removed from operation each year so it would take more than 20 years to replace the entire car parc assuming an equal amount of scrappage each year and no growth in the size of the car parc itself
· The penetration of driverless cars will likely be insignificant over the next several years due to regulatory and legal issues like government mandates, accident culpability, etc.
· Statistics show that autonomous vehicles have a higher crash rate of 9.1 vehicles per million miles driven compared to human driver rate of 1.9 because humans are finding it more difficult to adjust to the driving practices of autonomous vehicles; this should provide a tailwind to salvage volumes for at least the next few years which further delays the risk
· Even in a worst runoff case scenario where driverless car penetration is 100% from today forward, we estimate that the PV of Copart’s cash flows is greater than $4b which is over 70% of today’s EV
In addition to this, we believe there are offsets to these risks due to structural as well as Copart-specific actions:
· Salvage cars represent 4m+ of the 13m vehicles removed from operation each year and penetration is increasing as more buyers / sellers become aware of Copart’s value proposition
· Copart is growing in immature international markets which further expands its addressable market by several hundred million vehicles resulting in an even greater opportunity to process salvaged cars
|Subject||Re: 2017 assumptions|
|Entry||04/08/2016 10:41 AM|
The EPS growth is primarily driven by fundamental acceleration in the underlying business combined with a lower share count from recent tender offers and repurchases. We are using the following assumptions to get close to $3 in EPS:
· Revenue: $1.4b, 13% increase over FY16
o Volume: 10%+ growth driven by increased demand and greater number of yards (we note that volumes ran 12.9% in the most recent quarter and are accelerating based on our checks so this may be conservative)
o Revenue per Vehicle: 3% growth driven by higher prices and improved mix; upside to this number if FX and/or scrap metal headwinds reverse
· Gross Profit: $0.6b
o 45% Margin driven by increased volume and improved mixed
· EBIT: $0.5b
· Net Income: $0.3b
· Shares: 112m fully diluted; assumes modest repurchases
· EPS: $2.94
|Entry||05/26/2016 10:24 AM|
your thesis was spot on. would love to hear how you feel about the opportunity given today's move.
|Subject||Re: great call|
|Entry||05/27/2016 04:42 PM|
Thanks for the question. We believe that there’s still a significant opportunity to own Copart, even after yesterday's move. The Company is still in the early innings of accelerating volumes which will lead to significantly higher revenues, earnings, and FCF generation in coming quarters and years.