From Growth Play to Stalwart, Copart Still Compels

by Lawrence Meyers | December 6, 2012 10:08 am

As long as cars drive, cars will crash. And get trashed by acts of God, the weather and freak events that wind up on Google’s (NASDAQ:GOOG[1]) YouTube. All those cars go somewhere, usually getting salvaged and auctioned off. Copart (NASDAQ:CPRT[2]) proves there’s a market for everything because it buys those totaled cars, does indeed salvage them and does indeed auction them off.

And there’s usually a buyer for every one.

In this highly fragmented sector, Copart has emerged as the leader. It serves all the entities that end up with these wrecks, including insurance companies, banks, charities, car dealerships, fleet operators and 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[3]) or Progressive (NYSE:PGR[4]) or Berkshire Hathaway’s (NYSE:BRK.A[5]) GEICO off the hook.

Even better, Copart has developed an entire service infrastructure to support its operations, handling an estimation service, insurance company repair estimates, transport services, vehicle inspection stations, on-demand reporting, DMV processing and a parts-search service.

Oh, and auctions aren’t even conducted in person anymore. Now, they can be done on the Internet, which saves the overhead of a live auction.

For many years, Copart was my favorite stock. Times have changed, and the days of 20% growth are over. Nevertheless, Copart remains compelling even as a Peter Lynch stalwart play, and maybe capable of juicing out a 15% quarter, as it just did in Q1.

Same stores sales remain strong, up 5.9%. Copar kept yard operation expenses flat on a 6% revenue increase, so gross margins improved. Revenue per car was flat, but volume increased. Hurricane Sandy will contribute mightily to Q4, as management said Copart picked up over 30,000 vehicles with another 30,000 still to come.

The beauty of Copart is that it’s always been a robust cash-flow play. FY 2010, 2011 and 2012, operating cash flow was $199 million, $242 million and $230 million, respectively. The company has never been short of cash as a result and never took on debt until recently, when it pulled down $350 million for more rapid expansion and acquisitions. The average interest expense comes in at about 3%, so it’s practically free money from which Copart generate 20% net margins.

Management is fairly aligned with shareholders, with 15.5% insider ownership. I also like that several private equity firms have stakes, because these firms tend to take positions only in companies with robust long-term cash flow. Four of the top 10 holders are private equity funds, with a total stake of 13.7%.

Analysts see 12% growth for FY13, 11% the year after and 13.2% over the long term. A 13x estimate on $1.64 FY 13 earnings gives a fair value of $21.32. The stock trades right at $30, so it’s expensive on that basis.

But this is exactly the kind of stock I would buy on a 20% dip. Copart is in fabulous shape — even though its products aren’t — and it should remain so for the very long term.

As of this writing, Lawrence Meyers didn’t own any securities mentioned here.

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