Copart: The Perfect Business To Stay Away From Tech's Hype … – Seeking Alpha

Copart (NASDAQ:CPRT) is a wonderful business that auctions damaged vehicles. The company offers an enormous network, with almost 200 sites in 10 different countries, to sell damaged cars. The market is benefiting from solid tailwinds, but those will be stronger in the coming years. Then, Copart will benefit from the trend and will significantly grow for many years.

An excellent business model with wide competitive advantages

Copart’s primary source of revenue is the services segment, which represents 80% of its revenue. This segment consists of revenues from the storage and sale of vehicles.

When a car suffers an accident, the owner can decide whether to repair it or give it to the insurance company. If the latter occurs, the insurance company ends up with a damaged car and can do nothing else than sell it. Copart is the perfect solution to the problem. In effect, the insurer can give its car to Copart to introduce it in its vast network and sell it way easier than if they had to do it on their own. Each vehicle is stored in one of its yards and is introduced into its auction platform. In exchange, Copart charges a fee for the service. Furthermore, when the car is sold, they keep an additional fixed or variable percentage of the total price.

This top-notch business model creates a lot of value for its clients. In addition, offering high-quality services allows them to differentiate themselves from rivals. They provide valuable information to sellers, making the process a walk in the park. Effectively, their auction platform uses very efficient technology. It shows images, the estimated value of the fully repaired car (as well as the estimated repair price), and allows easy communication between buyers and sellers.

Moreover, the clients stand to benefit from their vast network. Copart sells vehicles to buyers from over 170 countries thanks to its online platform. Besides, they have over 200 locations in 10 countries around the world where the cars are stored: USA, Canada, Brazil, Spain, Germany, UK, Ireland, Oman, Bahrein, and UAE. Buyers can purchase vehicles from every location, as Copart offers a shipping service too. Nonetheless, buyers can also visit the closest site if they want to see the car. This creates a massive network, impossible to replicate, with many potential clients, something highly beneficial to Copart’s clients.

A powerful network effect

Copart’s platform and vast network are the perfect solutions to insurance companies. Every insurance company that does not join Copart is at a disadvantage. As a result, a powerful network effect appears, which gives Copart an enormous competitive advantage.

Copart is the most prestigious company in the market. Its large number of clients creates a massive network that generates a domino effect. The company’s prestige and recommendations generate new clients (a case similar to Microsoft and Apple). Every business must enter Copart’s ecosystem as it boosts its profits. This business model allows them to gain market share and get many deals with new insurers. For example, the expansion into the German territory seemed quite demanding due to the difficulty of obtaining licenses and the country’s long automotive tradition. Nonetheless, the quality of the business and its good reputation have led to these licenses being granted by German regulators. Furthermore, the insurers trust them, thus allowing their expansion in this market.

An unseen segment that can boost sales growth

Copart’s secondary source of revenue is the direct sale of vehicles. Not only are these services offered on the Copart website, but the company also has subsidiaries where it enters complementary markets. These are:

• Cash for Cars, Powersport Buyers, and Motorcycle Buyers: These are pages where people upload their cars, motorcycles, quads, boats, and jet skis and receive money for them.
• Crashed Toys: It’s like Copart, but, what was previously seen with cars, they do it with the Powersports section. This includes motorcycles of all types, marine vehicles, caravans, buses, and trucks.
• National Powerhouse Auctions: Copart acquired this company in 2017. They sell motorcycles, quads, jets and snowmobiles, caravans, boats, buses, and trucks. It is the most premium section of Copart.

This segment usually slips by unseen, as it is the secondary source of revenue. However, we should not forget about this segment. Indeed, many markets have a long tradition of products of this kind. For example, in Europe, motorcycles are very popular. Besides, the nautical world is also progressively catching on. Then, snow sports are traditional in Europe and South American countries such as Argentina. As a result, the company could increase its revenue by expanding these businesses to other parts of the world with a high demand for these products.

Automotive market trends are a strong tailwind

Over the years, the automotive industry has changed dramatically. And an even more drastic change is expected in the future. This a trend from which Copart will significantly benefit.

The increase in technology and safety increases the costs of repair

Firstly, cars contain more and more advanced technology. Although we might think that this affects Copart, on the contrary, they benefit greatly from it. The company is favored when the repair costs or the difficulty of repair are high. As I said in my latest article about Texas Instruments (TXN), today, a new car contains between 3,000 and 5,000 microchips compared to only 300 a few years ago.

This increase will continue in the future, especially with electric cars, with 2.3 times more chips than in an internal combustion engine-powered car. Therefore, cars tend to become more complex and have more advanced technology. Then, repairs are more demanding, which increases the salvaged vehicles’ rate (i.e., recovered by insurers). As a result, owners are more likely to do away with their cars, resulting in more vehicles for Copart.

On the other hand, cars are safer than ever, but this is not by chance. The materials used in cars have entirely changed. A safe vehicle can absorb a high amount of impact energy since this will reduce the energy absorbed by the passengers. However, how do you get a car to absorb more energy? The greater the hardness of the material, the less energy it absorbs. Then, we look for highly plastic materials capable of deforming easily and absorbing more energy. Despite this, this has another consequence. Softer materials suffer large deformations, making repairs more frequent, complicated, and expensive. So we see again a factor that favorably contributes to the salvage rate.

New cars are more expensive than ever

Finally, the automobile industry has changed its production and sales model, going from mass production to selling fewer cars at higher prices. This trend is rapidly catching on. Indeed, brands that offered vehicles for $20,000 offer cars for no less than $30,000. It is then more difficult for any ordinary person to purchase a car. This can significantly benefit the company. Indeed, those who cannot buy a new car will have to resort to this platform, trying to find cheaper cars and repair them.

Valuation

I use an Inverse DCF to find which growth the market is expecting at the current price. My required rate of return (WAAC) is 10%, and I am using a terminal growth rate of 3.5%. It is a relatively high TGR but could be even higher in this case. Indeed, a business of such excellent quality, with substantial competitive advantages, can ensure high growth for more than the 10 years usually estimated in a DCF. Though the company is very opportunistic with share repurchases, I include a -1% annual dilution. Indeed, they have plenty of cash on the balance sheet and no debt. Therefore, share repurchases or even dividends will likely occur in the future.

The stock currently trades at around $68. That leads us to an implied FCF growth rate of more than 14% annually. From my point of view, even though Copart will rapidly grow, this growth rate is quite optimistic, and I think the stock is currently a little overvalued.

I think the business can grow its FCF annually at around 12% to 13% for the coming 10 years, which leads us to an implied share price of $60.

Risks

Even though the company has strong competitive advantages and a top-of-the-line business model, there are still some risks that we need to pay attention to.

Nowadays, cars are little by little being equipped with a lot of different technological security systems. Those systems should reduce the number of accidents, which could harm Copart. However, these technologies make repairs more expensive, which benefits the company. In addition, the high price of new cars means that cars are kept for more years, increasing the chances of failure, something positive for Copart.

Furthermore, autonomous cars seem to ensure the disappearance of accidents, which would make the base of the company’s business model disappear. However, as strange as it may seem, the company shows data indicating that accidents have only increased since the introduction of autonomous driving. It is logical, as we try to make machines anticipate human behaviors and vice-versa. Also, the repair costs of these cars are much higher than conventional cars, which favors the company. Further, many people deactivate aids such as the automatic lane-keeping assistant when they lose all the essence of driving. Finally, a society full of autonomous cars still seems utopic. Autonomous vehicles need to be more affordable and appealing to medium-class citizens to become a normality.

Conclusion

To conclude, Copart has a top-drawer business model with broad competitive advantages. Because of this, the company will grow for a lot of years. Furthermore, the growth will be boosted by significant tailwinds caused by the automotive market.

Despite this, I think the stock currently trades at a premium. As a result, I rate the stock as a Hold and fix a price target of $60. I am pleased to have bought some shares at $55 a couple of months ago. If the price decreases again to my target price, I will gladly purchase more shares of this fantastic company, the perfect boring business to get away from tech’s hype.