2024-01-17 09:51:58 ET
Summary
- Car Auction industry growth driven by inventory diversification, rising used car demand, and online shift.
- Copart excels with a high-return model, vast scale, strategic land ownership, and innovative technology.
- Copart's high ROIC highlights its efficient operations and savvy management.
- Buying CPRT could yield a 7% stock price CAGR over five years.
Investment Thesis
In my perspective I consider Copart (CPRT) stock to be a hold given the current valuation even though it is a great business. For me, Copart stands out in the Car Auction industry. Its impressive Return on Invested Capital is a testament to its strength and strategic expertise. With a business model that has extensive scale advantages, valuable strategic land assets and innovative technology solutions Copart is well positioned for success. This is especially significant considering the industry's projected growth driven by factors like increased demand for used vehicles and the growing popularity of online auction platforms. I believe Copart's ability to thrive in this environment solidifies its edge.
Company Overview
In terms of company overview I believe that Copart holds influence in the online vehicle auction and remarketing sector. Its innovative and effective business model focuses on providing platforms and services for selling used, wholesale and salvage vehicles.
The company has an approach, by acquiring vehicles from sources such as insurance companies, banks, leasing companies, fleet operators and rental car companies. They then sell these vehicles through auctions to cater to a range of buyers. These buyers include vehicle dealers, dismantlers, rebuilders, exporters and sometimes even the general public. Copart mainly generates revenue through service fees charged to both sellers and buyers participating in their auctions. These fees encompass processing fees, auction fees, vehicle preparation fees and others. It appears that these fees provide a base for the company. Additionally I believe that the income generated from selling vehicles from their inventory also contributes significantly to their revenue.
When it comes to competition Copart faces rivalry from companies operating in the vehicle auction and remarketing industry. One notable competitor is IAA which is a player in the salvage vehicle auction market and a traded company. I think both Copart and IAA operate in a niche market but manage to maintain a wide customer base due, to the diverse range of vehicles they sell globally through their online platform.
Car Auction Industry Growth Forecast
The Car Auction industry is predicted to experience growth with an estimated value of $19,239.67 million, in 2022 and a projected CAGR of 4.33% to reach $24,813.36 million by 2028 according to the Car Auction Market Research Report for 2023 . Considering the interest rates, this growth is quite robust. Though we will have to see if the demand for vehicles as consumer sentiment is affected. Growth will be driven by the following factors. Firstly, auction houses are diversifying their inventory to attract a range of buyers leading to increased demand. Secondly there is a growing demand for used cars which expands the supply for auction and increases the number of buyers. Additionally, the COVID 19 pandemic has accelerated the shift towards car auctions, which has played a role in this growth trajectory. However, there are also challenges such as rising compliance costs within the vehicle sales industry. The Whole Car Auction segment that offers used vehicles and Salvage Auctions specializing in loss vehicles are key segments within this industry with Salvage Auctions expected to dominate by 2028. Geographically speaking China experienced the growth in 2022 while the U.S held a market share of 38.51%. One major player, in this industry is Copart which held a market share of 16.73% in 2023.
Copart's Distinct Competitive Edge
How does their advantage in the car auction industry differentiate them from their competitors? Let's look at the elements that make them market leaders.
Copart has developed a business model that emphasizes efficiency and reinvestment. This strategic approach also does not make them resilient during recession. Also prevents newcomers from entering the industry, creating a barrier of entry.
Scale is another major part of Copart's moat. By presenting different types of cars, they draw buyers who eventually also attract more seller for better deals. This results in a feedback loop that makes Copart's standing stronger and creates hurdles for opponents aiming to compete. Secondly, Copart has cultivated relationships with insurance companies and obtained exclusive agreements from industry players like Allstate and Nationwide. Such partnerships help a lot in the number of listings each agency provides.
One tactical decision that has had many benefits for Copart is their decision to buy rather than lease most of the deals, unlike what IAA does. This helps them effectively cater to insurance agencies across the United States in terms of reduced towing costs and logistics problems.
Finally, the technology platform maintained by Copart's gives them yet another competitive advantage in this field. The online vehicle auction platform that is central to the operations of Copart uses a technology referred to as Virtual Bidding Third Generation (VB3). It gives them the opportunity to sell damaged vehicles or those which have been retrieved after being stolen. Through this unique service, a network effect is created which lures bidders because they feature various types of vehicles with 80% attributed from insurance companies . The more bidders, the stronger Copart becomes within the marketplace, creating a cycle that is hard for other competitors to duplicate.
Copart's ROIC Is key To Compounding
Copart's success lies in the Return on Invested Capital which has remained within 20-30% range from 2015 through to the 12 months. This companies high ROIC shows this firm's efficiency and also can be attributed to its market position It shows that the Copart's business strategies have a high efficiency rate and excellent management practices they implement. One of the critical factors adding to Copart's ROIC is their online vehicle auctioning system, in particular, their VB3 technology. This platform has been able to achieve the network effect by bringing in a bunch of bidders. Consequently, it motivates more insurance companies to select Copart as their selling channel for vehicles. In addition to this, its strategic decision making, and operational excellence have contributed to the success of Copart. The company's cost management and technological optimization of its business model have been especially beneficial. While competitors depend on physical and hybrid auction methods, Copart only online overcomes costs by designing for this technology giving it a competitive edge.
That is why in my assessment, the excellent result of return on invested capital is closely related to Copart stock price growth. Starting from 2005, the stock price of the company has grown at a compounded annual rate of about 20.2% .This rapid rate shows how Copart is able to produce returns that are higher than its capital cost. It shows that company's investments have increase overall earnings over time.
Financial Analysis
Over the past 5 years, the company has demonstrated remarkable financial performance. Its revenue has shown a consistent and strong growth, increasing from $2,041.96 million in 2019 to $3,996.56 million in the last 12 months in 2023, representing a compound annual growth rate ((CAGR)) of approximately 14.4%. The earnings per share ((EPS)) have been equally impressive, growing quickly from $0.62 in 2019 to $1.37 in the LTM, reflecting organic growth, margin expansion and buybacks resulting in a CAGR of 17.2%. The book value per share has seen a consistent upward trend, growing from $1.85 in 2019 to $6.60 in the trailing twelve months, indicating a CAGR of approximately 29%. This suggests that the company has been successful in increasing rapidly increasing its intrinsic value over time.
As of the most recent quarter, the company reported cash and cash equivalents of $2,581.57 million. The company's total debt stands at $9.46 million, an irrelevant amount that reflects the company's conservative approach to leverage. The company's current ratio, a measure of its ability to cover short-term liabilities with short-term assets, is 5.74, which is very healthy in my opinion. Given these facts, CPRT has very little balance sheet risk.
Risks
It is important to consider some risks that Copart faces well. One notable risk is its reliance on insurance companies for 80% of its vehicle volume. This dependency could be risky if there are shifts in insurance company policies or regulatory changes. Expanding internationally comes with its set of challenges such as navigating regulatory environments. This can lead to increased costs and alignment issues in markets. However, despite these hurdles, Copart's strong financial position and significant net cash provide a foundation for resilience. Their management team is also focused on building long term relationships with insurers and adapting to market changes.
Valuation
CPRT's current EPS as of Q4, 2023 is $1.37. Based off projected market growth and expected business growth, I believe that CPRT's EPS should grow conservatively at 10% annually for the next five years. Therefore, once factoring in the growth rate by Q4 2028 CPRTs EPS is expected to be $2.21. If we then apply an exit multiple of 25, which is based off a conservative price to earnings ratio, this infers a price target in five years of $65.78. Therefore, based on these estimations, if you were to buy CPRT at today's share price of $47.57, this would result in a CAGR of 7% over the next five years.
Therefore, despite the greatness of the business, currently the price paid for the business is too large to warrant a buy rating as one could likely attain a 7% CAGR by investing in the S&P500, therefore I rate this stock as a hold.
Conclusion
The Car Auction industry is set to grow due to factors such as diversification in inventory, increased demand for used cars and a significant shift towards digital platforms. Amongst players in this expanding industry Copart stands out with its effective business model that generates high margins. The company has scale, ownership of land and adopts innovative technology. Its impressive return on invested capital indicates efficiency and strategic management giving it an edge. For those considering investing in Copart they can expect a 7% CAGR over the five years indicating that the stock is reasonably valued for achieving a market return. Therefore, I suggest holding at the current share price.
For further details see:
Copart: A Wonderful Business Offering Market Average Returns Due To Valuation