Copart (CPRT - $35.97) is the leading automobile auctioneer in the US, selling over one million cars a year. CPRT provides services for the processing and salvage of damaged vehicles, mainly for insurance companies. Using the internet and physical on-site storage services, Copart’s salvage buyers are licensed dismantlers, rebuilders and used car dealers. CPRT has operations in the US, Canada and England.
Ever wonder what happens to that shiny, brand new car you total on the way home from the auto dealer? The insurance company pays your claim and “disposes” of the car. The insurance company contacts Copart and they auction the car off to the highest bidder, retaining a percentage of the revenues as a fee. In addition to damaged cars, CPRT also provides used car auction services to banks, repossessers, and auto dealers
Founded in 1982, management has been excellent in generating revenue and earnings growth in this niche service business. Revenues have grown from $347 million in FY July 03 to $785 million anticipated FY10, for a compounded revenue growth rate of 15.7%. EPS over that same time frame have grown from $0.62 to $1.88 anticipated FY10, representing a 24.5% earnings growth rate. Since 2003, CPRT has increased earnings per share every year except one -FY 09.
FY 3rd qtr results were announced June 2, and were 6% better than expected. The company reported $0.52 a share on revenues of $220 million. The earnings gain is from higher revenue growth and a small UK acquisition.
Management is expanding its non-insurance business and has been heavily marketing its services through the NASCAR network. It seems to have paid off. The drivable, or clean title, auto segment (vs non-drivable, salvage title) has experienced great growth, rising from 12% of sales in 2009 to 16% of sales this past quarter, or a 23% YOY increase. In 2003, CPRT was one of the pioneers in developing an on-line auto auction site. Current US membership growth is in the high single digits and UK growth is over 20%. CPRT’s on-line sites offer both clean and salvage title autos.
Copart’s niche business is quite profitable. Gross margins in the most recent quarter increased to 49.6% from 47.6% last year. Due to higher marketing and compensation expenses, net operating margins declined a bit to 32.7% from 32.9%.
Growth for CPRT will be in several areas. The company was recently designated as the sole provider of auction services to Allstate. This exclusive contract should add $45 mil in revenues, $0.10 a share in earnings, and an additional 200,000 vehicles a year. Internationally, management has been acquiring auction services in England and recently added to its total of 17 sites.
Copart is used as an example of outstanding management in my book published in 2002. Eight years later, management continues to provide excellent long-term performance for shareholders. Management has developed a strong fee-based business model, built on small acquisitions. The company currently owns 140 storage facilities, the largest number in the industry. CPRT operates in a market that has higher barriers to entry due to large tracts of land needed for storage and delivery, along with local zoning and permitting requirements. CPRT offers national coverage, and its size and efficiencies are becoming difficult to duplicate. It is estimated CPRT currently enjoys a 35% market share.
Copart is a small-cap company with a market cap of $3.2 billion and 84.2 million shares out. The company has no debt and as of 3/30 had $264 million in cash, or $3.14 per share. Annual free cash flow is around $1.79 a share.
Share prices have been relatively expensive on a PE ratio comparison for some time. CPRT is a growth story, not a value investment. Share prices have been treading water since May of last year, trading between $32 and $37. Since Jan, the stock price has held right at $35.
EPS for FY2010 should be $1.88, with $2.10 to $2.30 expected in FY2011 and $2.60 to $2.70 in FY2012. Long-term earnings growth should be in the 18% range, with a stock price PE to match. This would create a price target in the high $40s. Any weakness below its current price could be considered a good entry point for longer-term investors.
Copart is an overlooked small cap growth company in a profitable and growing niche market, and should be on a research list. With a simpler business model and excellent balance sheet, conducting due diligence should be easier. A good place to start is their conference call transcripts. The most recent posted is March, with an update anticipated shortly for the most current qtr. The company website is more client than investor oriented.
As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.
Disclosure: No position
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