I wrote a couple of reports on this company in 2023. These can be found here and here. If you are not very familiar with the company, I would recommend reading the first of these.
The company operates salvage yards for written-off cars and auctions them using if own online auction software (called VB3).
80% of its revenues comes from the United States where it has yards in 48 states.
The company has a strong balance sheet with no debt and significant net cash.
The company has a three-decade long track record of profitable growth in this industry. It has grown by acquisition as well as organic growth.
The industry is effectively an oligopoly and Copart is the dominant player with a 53% market share.
I believe the main moat of the company is the land it has acquired over the decades for salvage yards. It would be very expensive for a new entrant to buy land today and very difficult to get environmental clearances needed to operate yards.
In the report cited above, the company’s growth strategy was described as follows:
Copart's growth strategy is to increase revenues and profitability by, among other things:
acquiring and developing additional vehicle storage facilities in key markets, including foreign markets.
pursuing global, national and regional vehicle seller agreements; increasing its service offerings; and
expanding the application of VB3 into new (non-auto) markets.
The Results
The most recent quarterly results indicated continued progress with no real surprises.
Total Revenue increased by 14.2%
Global unit sales increased nearly 13%. U.S. business saw unit growth of over 10%,
In the U.S., Average Selling prices (ASPs) were down 2%. Insurance ASPs were down 1.7% compared with a 4% decrease in the Manheim Used Vehicle Price Index.
The smaller international businesses and services business revenue grew faster than the dominant car salvage business.
International business grew over 24% boosted by a 7% growth in ASPs.
Global service revenue increased by 18%. Within that, U.S. service revenue grew by 17%, and international service revenue grew by 29%.
Gross profit increased by 26% and the gross margin increased by approximately 400 basis points to 45.5%. U.S. margins which increased to 49.9%, and international margins decreasing to 24.9%.
GAAP operating income increased by nearly 27%. GAAP net income increased by over 35%. The faster growth of operating income and net profit compared to revenues shows the business model continues to have significant operating leverage.
Operating margins rose from 34.9% to 38.9%. Net income margins rose from 21.5% to 22.6%.
The Return on Equity (ROE) continued its recent gradual decline and fell to 21.3% compared with 22.7%. This not surprising as the cash pile increases, and the less profitable international business grows more strongly and increases its relative contribution.
The Return on Invested Capital (ROIC) fell from 30.3% to 30.2%.
Operating cash flow increased by 20% and the company generated $213 million of free cash flow. End quarter total cash rose by $270mn to $ 2.6bn. Such a large cash holding will tend to depress overall returns a little.
Management Comment
“We remain focused on building long-term value for our shareholders and endeavour to continue our strong track record for years to come. To achieve this, we will continue to use our disciplined approach to capital allocation and remain patient, flexible and opportunistic...(Our) first priority is to deploy capital to grow our core business, where we will continue to invest in our people, operational capabilities, including logistics, technology and real estate, as well as our customer experience.”
Valuation
We concluded our last report with the following thoughts on valuation.
“… it could be argued that a company with an ROE/ ROIC of ~23% to ~26% and an operating margin of ~ 37% is only slightly overvalued at current valuations.” However, the forward P/E ratio has fallen from 34 times to 28 times, so the stock is more reasonably valued than was the case two months ago.”
The stock price is at the same level as at the time of the last note and has underperformed the market.
The market in recent months has been focused on technology especially the magnificent seven stocks which have dominated S&P 500 return. Old world companies like Copart have been ignored.
The Forward P/E Ratio is at 30.7 times and remains slightly over-valued given the current financial parameters.
We will continue to hold on given the balance sheet strength and attractive long-term prospects for the company,