2023-04-29 02:30:59 ET
Summary
- CPRT is one of the world's leading online auction and vehicle resale service providers.
- The company has a natural hedge, competes in a high-barrier-to-entry market, is founder-led, and benefits from excellent capital allocation.
- The company's long-term success hinges on its robust resources and moat.
Investment Thesis
Copart, Inc. (CPRT) is one of the world's leading online auction and vehicle resale service providers. The company has a natural hedge, competes in a high-barrier-to-entry market, is founder-led, and benefits from excellent capital allocation. These elements and the fact that the company operates in a prosperous market have been crucial to its continued success.
To demonstrate that the company has been a boon, CPRT stock has been on an upward trajectory for ten years, gaining more than 778% compared to the S&P 500 return of 156%.
I think the company's long-term success hinges on its robust resources. The organization has a leg up on the competition thanks to the availability of the aforementioned assets. In light of these encouraging fundamentals, I recommend CPRT stock to growth-oriented investors as a buy.
A Fantastic Company in a Fantastic Niche
In addition to being a market leader, CPRT is also founder-led, has an excellent capital allocation, and benefits from a built-in hedge. The company stands out because it caters to the underserved market of totaled and unrepairable vehicles and stolen vehicles that have been found. It acts as a hub for auto industry buyers (such as dealerships, dismantlers, rebuilders, and exporters) and sellers (such as insurance firms) to interact.
The company went public in 1994, but it wasn't until 2003 that its business model shifted to focus only on the web. Copart is now a technology-driven business that provides a global platform for remarketing and selling salvage automobiles. It has more than 200 sites in 11 countries , and every day it auctions off more than 175,000 vehicles.
In a typical marketplace plan like Copart's, the size of the business is a key competitive advantage. Buyers like to see a lot of other listings, while sellers prefer the site with the most listings. I believe its strong entry barrier helps fortify the company's economic moat. The organization has access to a large clientele and over 150 licensed salvage yards in proximity to major U.S. cities.
It's important to note that, in almost all situations, the seller keeps ownership of the car until the deal is done. This means that Copart doesn't buy the car in hopes of selling it later, so it doesn't have to have a huge amount of working cash.
Outperforming Its Peers
There are a lot of great stocks in the Business Services group, but buyers should always look for companies that do better than their peers. Since the beginning of the year, CPRT has returned around 26.6%, according to data. Meanwhile, year-to-date returns for the Business Services industry have averaged out at 0.4%. So far this year, CPRT Inc. has been performing better than its competitors based on this evaluation.
Is CPRT Worth The Risk?
The global automotive market has experienced tremendous volatility over the past two years due to rising demand and inadequate supply. This, in my view, forms the risk involved in investing in this sector. Investors have paid close attention to the auto parts and manufacturers sectors but have given less attention to the salvage auto sector. Copart is the biggest player in this market, so is the stock worth buying?
Financials: Very Pleasant
Copart's global revenue grew by 18% in the most recent quarter, and its service revenue grew by 14.2%. The company had $883.4 million in sales and $263.7 million in profit. Higher average selling prices were a major factor in these growth rates. However, it should be noted that Copart accomplished this despite challenges caused by fluctuations in currency exchange rates.
Earnings for the quarter came to $1.13 per share, which was more than the average expectation of $1.08 per share from analysts. The quarter was also better than the previous year when Copart posted earnings per share of $1.03. Over the last 12 months, the company made a total of $3.5 billion, 30 percent more than the previous year.
How About Slowing Rate Of Used Car Sales?
CPRT seems to be a secure corporation, with a competitive advantage in a small market. The company's debt level is now close to zero, freeing it from the burden of having to pay off debt. It has no mortgages or other obligations and owns 90% of its properties.
However, a decline in the used-vehicle market poses a threat to Copart. After two years of unprecedented price increases, both new and used car sales have begun to slow , resulting in lower pricing. CPRT and other businesses dependent on the secondary auto market may see shrinking profit margins and revenue as prices fall. But this threat is probably low to medium. As long as chip shortages persist, interest in pre-owned automobiles is expected to stay strong.
The fast rise in interest rates in 2022 is the last obstacle for Copart and other vehicle businesses. Consumers may decide to hold on to their old vehicles for an extended year or two due to the higher cost of financing compared to when it was cheaper in the past.
This company may suffer from the general slowdown in purchasing activity. However, because it specializes in selling used cars, the company should be less impacted by rising interest rates than establishments that sell brand-new cars.
The Verdict: Why it's Worth It
There is a lot to appreciate about Copart, despite the fact that it may not be a showy, high-growth tech investment. CPRT's appearance of a respectable moat is one of its better qualities. Although fairly profitable, the salvaged vehicle industry can be challenging to break into. It is, therefore, improbable that new competition will dislodge it. A lesser rival would find it challenging to duplicate its success due to its size and huge margins.
Its sizeable institutional ownership percentage can also inspire retail investors. About 80% of the company is owned by investment firms, and over the past year, inflows have significantly outpaced outflows. As a result, it appears that institutional investors have a reasonable amount of faith in the company's prospects for the future.
There is little doubt that the current condition of the car sector presents Copart with some immediate difficulties. However, the company's substantial competitive advantage and absence of debt suggest that these threats are not likely to represent a serious long-term danger. CPRT stock looks like a moderate buy and could be a good choice for conservative investors.
For further details see:
Copart: A Good Business In A Unique Niche