The history of Copart (CPRT) — the country’s largest operator of junkyards and auto salvage auctions — is pure American, asserts Doug Gerlach, editor of Investor Advisory Service.
Self-educated businessman Willis Johnson founded the company in 1982 on a dirt lot in California and determinedly bought up salvage yards across the country, signed national contracts with insurance companies, and shifted live auctions to the Internet, becoming the world’s first online seller of automobiles.
The business is wonderfully simple. When a car is in an accident, the owner’s insurance carrier estimates repair costs. If the cost exceeds the car’s pre-accident value less its salvage value, the insurer sends the “totaled” car to Copart.
The title is then transferred to the insurance company and Copart auctions the vehicle online to the highest bidder, with the proceeds going to the insurance company. Copart takes a sales commission from buyer and seller, typically a percentage of the sale price.
The company also generates fees for services such as transportation and storage. Buyers include vehicle dismantlers, who sell the parts to mechanics and body shops. Insurance companies make up approximately 80% of sellers, with the remainder coming from banks, charities, finance companies, car dealerships, and car rental agencies.
Copart’s key advantage is it has built the most liquid marketplace in the salvage market. It works to sustain and grow this advantage by proactively cultivating a global buyer network. Its vast online database connecting sellers and buyers results in superior auction returns for sellers and highly efficient inventory matching for buyers.
Other competitive advantages include its decades-long relationships with major insurance carriers, its salvage yard footprint around densely populated areas, and desktop and mobile virtual bidding technology. This has allowed Copart to gain share in both insurance and non-insurance markets.
Copart eschews Wall Street short term focus and consistently takes the long-term view. The company had the foresight to primarily buy the land underneath its salvage yards. There are advantages to this approach, especially in an inflationary environment.
We think Copart can leverage 10% sales growth into 15% EPS growth over the next five years. If we project this growth forward and apply a high P/E of 30.0 we get a potential high price of $271. Applying a low P/E of 17.5 to trailing EPS of $4.49 gives a possible low price of $78. This yields an upside/downside ratio of 4.7 to 1 and projected annual return of 19%.
