Copart Inc (CPRT)
Q4 Quarterly Results - Business as usual
A few weeks ago, we wrote a detailed report on Copart Inc which can be found here.
On September 14th, the company reported its Q4 Results for the three months ending July 2023. This quarter also marked the end of the Fiscal Year 2023.
We report and comment on the results here and we also report on the post-results conference call.
Results
In general, the Q4 results beat analysts’ expectations.
Copart is now on a quarterly revenue run-rate of $ 1bn. For Q4 it reported revenues of $997.6 million, beating the consensus estimates of $950 million. It was 12.9% higher than the same period last year.
Service revenues accounted for 83.6% of the total revenues. Q4 service revenues were 18% higher at $834.2 million and beat expectations of $785.8 million.
Vehicle sales totaled $163.3 million in the quarter, down from the prior year’s level of $175.6 million but were still higher than analysts estimates of $156.9 million.
Gross profit rose 20% to $457.6 million.
Operating income rose 20% to $390.6 million
Net income rose 31.9% year over year to $347.8 million.
Comment. The headline results were positive and better than expected. Bottom line grew 31% on top line growth of ~13%. So a pleasing indication of progress and continuing operating leverage.
For the full fiscal year 2023, global revenue increased 10% to $3.9bn
Global service revenue for the full year was 12% higher.
Average selling prices (ASP) at salvage auctions were up slightly year-over-year for Q4 with U.S. average sales prices up about 2%. This is positive especially when we compare it with the 11% decrease in the Manheim Index (Index for second hand car prices in the USA) which had risen during the pandemic and post pandemic period but has been falling recently (see below)
As we noted in our earlier report on Copart, lower second hand values prices increases the incentives to salvage cars therefore increase the supply of vehicles for Copart to auction.
For Q4, Gross margins increased by approximately 270 basis points to 45.9%. US margins increased to 51.2% and international margins decreased to 21.4%.
This is broadly as foreshadowed in our report. Copart has a very high market share in the very profitable US market. It is seeing much higher growth internationally but margins there are much lower.
There was a 13.8% increase in sales our Blue Car division. This is the fledgling business for selling undamaged second hand cars on their internet platform.
As the Chart above shows, the margins remain high with Gross, Operating and Net margins at 47.3%, 41.1% and 34.3% respectively.
The balance sheet continues to be liquid and strong. Cash ($2.4bn) and current Assets $3.3bn) account for 35% and 48% of total assets respectively. Long-term debt at $ 11mn is negligible.
Post-results conference call
In the prepared remarks, the company chose to speak about the role Copart plays in assisting communities in recovering from catastrophic weather events. These events are a lot of work for Copart and they lead to a lot of damaged cars.
“The 2023 hurricane season has been forecast to be "above normal" according to the National Oceanic and Atmospheric Administration, a division of the Department of Commerce.”
“So far in 2023, we've experienced 12 named storms, more than double the number we encountered last year. Thankfully, for our insurance clients and their policyholders, the insurance loss impacts of the first hurricane to make landfall this year, Hurricane Idalia, were relatively modest in comparison to major storms in prior years.”
“The threat of a more substantial event nonetheless remains in 2023 as many of the most significant storms in the past 20 years have occurred late in the season. Last year, Hurricane Ian was a terrible hurricane.”
“Well before landfall, we deployed hundreds of team members, Copart-owned and third-party-owned tow trucks and Copart-owned loaders, telecommunications equipment and generators from around the country to the region.”
“For a given storm quarter or year, our investments in catastrophic readiness may appear to be overkill, but we recognize the responsibility we have to our customers and to the communities we serve together to optimize our readiness for such severe weather events.”
“The total loss frequency troughed at 17.1% in the second calendar quarter of 2022 and has subsequently rebounded to 18.8% in the second calendar quarter of 2023. Our expectation is the new and used vehicle prices are likely to stabilize or decrease in more swiftly than repair cost will. We believe this, in turn, should lead to a recovery in total loss frequency eventually surpassing pre-COVID levels as well.”
Comment: The higher, the total loss frequency the greater the supply of cars to the Copart auctions
“Our insurance clients continue to experience hiring and retention challenges. And we, therefore, believe they'll lean still more heavily on trusted partners like Copart to provide additional services, including virtual inspection, loan payoff and title procurement services, among many others.”
“Finally received approval from the competition authorities in the UK to complete the merger of our acquisition of Hills Motor Company. Hills Motor Company is a leading vehicle dismantling business in the UK, our insurance customers in the region have made clear to us that they prefer us to be partially -- to be partially vertically integrated in auction vehicles on their behalf while also directly satisfying some of their needs for recycled parts.”
Comment: the gradual long-term expansion outside the saturated US market continues’
“We continue to invest in growing our global buyer base by driving member recruitment, registration and activation. As a result, our auctions provide insurance customers with best-in-class liquidity and returns, ultimately providing a more cost-effective way to manage growing claims costs by making it more cost effective to damaged vehicles of the total loss.”
“Our teams remain focused on optimizing our operational processes by leveraging technology and automation to mitigate the inflationary impacts we've experienced across our labor and transportation cost.”
Comment: There are inflationary headwinds due to higher labor and fuel costs which is putting pressure on margins.
“We invested nearly $517 million in capital expenditures, with over 80% of this amount attributable to our physical infrastructure and more specifically, capacity expansion, which contributes to our ability to serve our customers, while simultaneously reducing our transportation costs and corresponding fuel consumption.”
“Finally, year-to-date, if you take our operating cash flow less CapEx, we've generated over $847 million of free cash flow. Given the strong financial position, we intend to continue to invest in our business to meet our customers' needs. These investments include yard expansion, new yard acquisition, logistics and our technology platform.”
“We forecast 5 and 10 and 20 years at a time. And so very much still have the appetite for significantly more investments as well in land and capacity in part to support the growth.”
“And I think what we know we're good at is managing a high-volume digital auction platform, which we've done now for literally 20 years. So we started that in 2003 and have refined our approach repeatedly over the years and think we have a best-in-class online digital real-time auction platform, part one.”
“Part two, I think we're good at managing the complex physical logistics of moving cars around, literally millions of vehicles that we retrieve from various places, including homeowner premises, dealers, repair shops and the like and deploying all of the employees and subcontractors to retreat them. We think we're good at managing complex regulatory environments as well. So we have 50 different DMVs, a multitude of different countries that we serve that have different title processes and so forth, and we can navigate those universe as well. ”
Conclusions
The company continues to perform. Growth is much faster in non-US markets but US markets are more profitable.
We noted the following at the end of our previous report: “… 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.
We continue to hold on to our investment