As long as cars are on the road, cars will be destroyed. Crashes, hurricanes, floods, freak accidents — you name it, and every year you can be certain cars must be salvaged and auctioned off. And company called Copart (NASDAQ:CPRT) proves there’s a market for everything because it buys totaled cars, salvages them and auctions them off. And believe it or not, buyers are plentiful.
Copart is quickly becoming the brand name in this highly fragmented sector and thus serves all the sources for salvaged vehicles: insurance companies, banks, charities, car dealerships, fleet operators and vehicle rental companies. If someone’s car gets stolen and an insurance company pays out, but the car is recovered, the insurer is left with a car it doesn’t want. Copart steps in, and takes a company like Allstate (NYSE:ALL) or Progressive (NYSE:PGR) or Berkshire Hathaway’s (NYSE:BRKA) GEICO off the hook.
Copart is also a one-stop service for all things involving salvaged autos, handling an estimation service, insurance company repair estimates, transport services, vehicle inspection stations, on-demand reporting, DMV processing and a parts-search service. In addition, auctions aren’t merely conducted in person anymore. Now they can be done on the Internet, which saves the overhead of a live auction.
I’ve loved Copart for many years, so it’s time to check in and see what’s going with its numbers. Is it still the growth story it once was?
Well, it just reported earnings, and revenue for the three- and nine-month periods were up 3.1% and 6.2%, respectively. Net income was up 10.6% and 9%, respectively. Diluted earnings per share were up 22.9% and 31.6%, respectively. Margins expanded across the board.
Frankly, I’m a bit disappointed that net income growth has slowed this much from the 15%-20% clip is had been maintaining. The huge jump in earnings per share is due to a huge stock repurchase program, in which Copart bought back 27 million shares over the past nine months, or almost 18% of outstanding stock.
The amazing thing about Copart is that until last year, it had run for six years without incurring any debt. It did take on $350 million last year, but it churns out tons of free cash flow, so debt service is not a concern. The credit facilities permit repurchases of stock, capital expenditures, permitted acquisitions, working capital and other general corporate purposes.
Management says it has $200 million cash on hand as well, to have the flexibility to make acquisitions and to expand further into Canada and the U.K.
Copart trades at a 17 P/E on 2012 earnings, with five-year annual growth rate estimated at 13%. It generates $200 million of free cash flow annually, and runs a very efficient operation. I’m not crazy about the stock price at the moment, closing on June 4 at $25.31, but it isn’t wildly out of whack with reality. It’s probably a safe buy here, buttressed by the 15% insider ownership and 19% net margins, and I prefer this stock over the insurers.
Lawrence Meyers does not hold a position in any company mentioned.
