One man’s trash is another man’s treasure. For proof, look no further than
Copart,
the world’s largest auctioneer of salvaged vehicles. Its stock looks like a gem, too.
Copart (ticker: CPRT) trades in junked cars. Those range from wrecks that still have value as a source of parts to near-perfect cars that are simply uneconomical to fix but can be driven legally overseas. Insurance companies—eager to recoup payouts to drivers—sell these vehicles to willing buyers around the world through Copart, which takes a fee based on the sale price. It’s a steady business, one that has grown consistently over the years.
That much is obvious from Copart’s stock. Shares have jumped more than 50% this year, bolstered by another in a long string of upbeat earnings reports. For Copart, it doesn’t matter if used-car prices are falling, as they have been. Its fees are variable, depending on a vehicle’s selling price, and price declines have been offset by increased sales volume. The fact that it operates in a virtual duopoly with IAA—was acquired by
RB Global’s
(RBA) Ritchie Bros. in March—while likely gaining market share globally also provides plenty of visibility into its business.
“It’s an absolutely necessary part of the auto-insurance ecosystem,” says Stephens analyst Daniel Imbro. “[It’s also] a fantastic, high-quality, compounding growth company.”
And compound it has. Over the past five years, earnings per share have almost tripled, and the company earned a record $1.26 a share in fiscal 2023, which ended in July. Fiscal 2024 should also set a record, with the consensus calling for EPS to jump nearly 14% year over year to $1.43, while revenue climbs 8% to $4.2 billion.
Gross margins are also healthy, at 45%, in the most recent fiscal year, a sign of just how strong Copart’s business is. It has the pricing power to set its own fees, says Brian Yacktman, founder and chief investment officer of YCG Investments, and the largest network of buyers and sellers, which keeps its customers coming back. Copart has also been remarkably immune to economic downturns, as accidents happen with predictable frequency in relation to the number of miles driven. It even owns its own junkyards. “That means there’s extremely low disruption risk, and it just acts like a consistent toll taker on the auto industry,” says Yacktman, whose firm owns the stock.
In fact, junking cars appears to be a growth business. The number of salvaged vehicles that are destined for auction has been trending higher over the years. That’s because the average vehicle age has risen—older cars are less valuable and thus more likely to be scrapped—and the increased use of technology and safety sensors means even seemingly simple fixes have become more costly, so insurers often pay to replace rather than repair cars.
The latter means that the rise of autonomous driving is less of a threat to Copart than to other businesses that serve the auto industry. Self-driving cars may have fewer crashes, but are “totaled”—and junked—more often because of their pricey tech components. While those cars can’t be driven in the U.S., they can in many emerging markets, which have fewer regulations, providing a boost to sales in those regions. In addition, as Copart’s worldwide network grows, it’s likely that its international business margins, which are about half of the company’s pretax margins in the U.S., will expand, boosting overall profitability.
“It has become a reliable supplier of cheap vehicles overseas,” says Stephens’ Imbro, who has a price target of $53 a share, up 14% from Wednesday’s close of $46.62. Continued market-share gains and international growth can fuel increased multiple expansion on top of this year’s rally, he says.
The fact that auctions have long been held online means that Copart can expand across borders more easily, and it has seamlessly transitioned to an e-commerce-first world. “Copart has done an incredible job investing in technology, which has put them at the top of the industry,” says Allspring Global Investments senior portfolio manager Bryant VanCronkhite.
With Copart trading around 30 times forward earnings, the shares aren’t cheap. Still, they trade right in line with their five-year average, even as top- and bottom-line results continue to grow. Its $2.3 billion in net cash provides plenty of flexibility, as the company has historically tended to opportunistically scoop up stock via repurchases after selloffs.
“Copart is one of the greatest businesses on the planet: It’s an incredible, predictable compounder that’s virtually recession-resistant,” says Yacktman. “As far as valuation goes, today people are chasing riskier businesses, and overpaying for those to try to get rich quick, but underpaying for predictable, get-rich-slowly businesses like this that are almost guaranteed to grow earnings.”
Who knew junk could be so profitable?
Write to Teresa Rivas at [email protected]
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