Line of Business
Copart provides an online auctioning platform for Salvage vehicles. It also provides services to vehicles buys/ sellers to make the process smooth. Revenues consist of sales transaction fees charged to vehicle sellers and vehicle buyers, transportation revenue, purchased vehicle revenues, and other remarketing services.
Geographic Scope
•Revenues: US 78%, UK 21%, Canada 1% and others (2012)
•Auction Volumes Breakdown: Insurance 80%, Non-Insurance 20% (2012)
•CPRT Selling Method: Agency Role (Service Revenues) 81%, Principal Role (Vehicle Sales) 19% (2013 stats)
Elevator Pitch
•Cheap: Based on current valuation of around 16x-18x next yr earnings stock seems to be fairly valued. If we adjust for losses or less profitability for international operations the valuation could be cheap.
• Safe: Large players in the industry with over 40% market share. Strong member based. Recurring revenues from insurance players & institutions
• Upside: Expansion into different regions provide upside.
Description of Business / Business Model
•Primary business to auction Salvage cars online
•Copart is both Agent as well as Principal in Vehicle sale business
Agent Business Model:
• In US it acts as agent essentially selling vehicles on behalf of insurers and others on a consignment basis.
•Copart charges a fee based upon a % of the transaction price to both the buyer and the seller or a pre agreed flat fee.
•Buyers fee might be of larger part of revenues as large sellers (bulk sellers) like insurance companies are likely to receive volume discounts
• Agency model has gross margins in the range of 47%- 50%
•They also charge fee for towing & storage and other value added services such as timely pick-up & delivery services
• In Germany & Spain company derives fees from sales listing on behalf of insurance companies
• Insurance cars command a lower average selling price than non-insurance cars.
Principal Business Model:
• In UK it acts as both principal as well as Agent.
• While as Principal it buys the cars from Insurers or others and sells it from its own account
• In UK Insurance companies generally tender public contracts for the purchase of Vehicles
• CPRT profits from differential between buying & selling the car
• Principal model has gross margins in the range of 13% - 16%
Note of Revenue Recognition:
•Agency Model revenues is commissions earned on transaction
• In Principal Model revenues are selling price of vehicles & buying price of vehicles are taken into COGS
Process
• Once CPRT receives pickup order from the client (mostly insurance companies) they arrange for the transport of vehicle to a facility
•CPRT pays advance on behalf of customers to get vehicle released from towing company/vehicles repair facility etc
• This advance is recovered from customer later
• Salvage vehicles remain in their storage facility until ownership documents are transferred from the insured vehicle and the title is cleared with regulators which take 46-60 days of vehicle pick-up
• For non-salvage vehicles seller will deliver the vehicle to one of CPRT locations where all the information is taken and then information is uploaded on the platform.
• In winter there are more weather related accidents thus demand for their services is higher in those seasons.
• Company needs to buy land to build storage facilities
• Independent sub haulers are used in US, Brazil & some in UK for moving vehicles to & from storage facilities
• Foreign bidder of salvage vehicle represents significant chunk of buyers. They import the salvage vehicles in their country (e.g. Mexico importing from US)
Operating Cost Components
• Yard Management, Clerical & Yard Employees, Rent, Contract Vehicle towing, insurance, fuel, equipment maintenance & repair, cost of vehicle sold under contracts etc
• G&A costs includes executive mgmt, accounting, data processing, sales personnel, human resources, professional fees, R&D and marketing expenses
Company Positives
• Low Capex Business with limited working capital requirement
• Strong technology leadership of the company with patent protected platform VB2
• Market leader with 40% market share in US
• Expanding in Non-US regions
• Highly cash flow positive business
• High margin business
• Hidden real estate value
• Country wide presence creates barrier to entry for small players who can only be localize and needs time & resources to spread country wide
•Initial impact of acquisition could results in lower overall margins as it takes time to bring the acquired company to full profitability this could create an opportunity to buy as earnings are Depressed. This could be the case currently (i.e. Sept 2014)
• Company is buying back share on a regular basis. Sometime it’s financed by debt which results in increasing interest expense but lower share count both of which has opposite effect on EPS. So trade off need to be studied
• Company trying to increase transaction in UK from Principal model to Agency Model. This should reduce inventory risk and working capital requirement as well increase margins
• Company is able to cross sell value added service to its customer which makes them sticky
• Strict checks in place by company to make auctioning process meaningful and avoid any frivolous bids.
• Margins better than competitor.
•Mgmt realizes that they are a mature market leader so need to expand rationally overseas to give growth to investors
•Significant come back users
Company Negative
• Number of accidents is coming down because of technology advancement. The active safety features in car such as anti-lock brakes, electronic stability control, blind spot detection, collision warning, automatic braking etc is leading to lower accidents and thus lower salvage car business
• Check if the one time effect of exclusive contracts is beginning to fade. This would mean earnings growth will slow down.
• Auction fees can come down due to lower value of used vehicles (check the dependence)
• Historically overseas acquisitions have taken time to come to profitability of CPRT
• Under the Principal business model company takes inventory on its books and is exposed to unrealization of higher resell value
• Vehicle dismantlers could directly purchase from insurance companies.
• Independent sub haulers could affect company brand & reputation. They also charge more with higher fuel prices
• Import restriction on Salvage vehicles (e.g. in Mexico in 2008) could affect business
Company History
• Founded in 1982 by Willis Johnson
• Expanded in US, Canada, Brazil, UAE and Germany over time
•Public since 1994
• Acquired 20 salvage vehicle auction facilities in 11 states from NER Auction Group
•Processed nearly 17,200 salvage vehicles in 1990 to 410,000 by 1997
•Goes to online auction model in 2003-4
•Enters UK market in 2007 by acquiring Universal Salvage PLC
• In 2008 initiates CPRT Dealer Services & Copart Direct
•Enters Dubai with acquisition of Ride Safely Middle East Auction
Customers
• Buyers of Vehicles at Copart auctions include metal recyclers, vehicle dismantlers, vehicle rebuilders, vehicle repair shops & used vehicle dealers. These buyers can register with CPRT and pay one time & annual member fees.
• These registered buyers can help other non registered buyers to participate in sales.
• Customers of Copart are insurance companies - who want to sell the car covered under their insurance coverage, bank & financial institutions - who wanted to sell the car covered under their loan, Reseller & Car Dealers - who wants to resell used cars, Car Dealerships, Fleet operators & Vehicle Rental Companies are also their customers
• Nearly 82% of total vehicles processed during 2011, 2012 & 2013 were from insurance companies
• Use in house sales force to target customers
Industry Overview
• Highly concentrated industry
• Copart being market leader currently captures 40% of market
• Top 3 makes nearly 85% of the market
•New Vehicle Sales Run Rate about 17mm/yr
• Vehicles Removed from Operations 13mm / yr
• Salvage Rate ~ 3-4mm / yr
• Whole Vehicle transactions in US ~ 45mm / yr of which 13mm is consumer to consumer & 32mm / yr is Auction & other purchase
• KAR's Salvage Auction Division makes ~ $460 / vehicle vs. for Whole Car Resale division makes ~ $545 / Vehicle
• American Car (i.e. number of vehicles in the region) about 275mm (2013),
•Average age of cars in US about 11yr (2013). It was 9yr in 2003.
•Lag between New car sales & whole car resale is about 2-4yrs
Competitors
• KAR’s Insurance Auto Auction Division
•Auction Broadcasting LLC
• Manheim TRA.
• Large Dismantlers such as LKQ Corp, American Recycling Association, United Recyclers Group etc which may purchase salvage vehicles directly from insurance companies
• UK only privately held independent companies
Earnings Growth Driver
• Technology advancement leads to lower resell value of car
• Decreasing resell value of cars leads to more salvage sell
• Increased cost of repair also results in either salvage selling or reselling of car
• Salvage value is also impacted by commodity prices so if commodity prices go up or down salvage so should salvage value. Metric is per ton price for crushed card bodies
• Average age of car on the roads are increasing so salvage cars go up
• Increasing number of accidents can lead to more salvage business
• Increasing buying/selling of cars lead to growth in second hand resell business of the company
• Expansion outside US leads growth in business
• Shifting from off-line auction based business to online platform leads to higher margins and profits
• Exclusivity agreements with Insurance & banks lead to additional business from the customer and thus market share gain
• Acquisitions has also lead to growth historically
•Increase in amount of revenues generated per transaction
M&A
• First acquisition outside USA was in 2007 in UK
•UAE in 2012 Aug.
•Brazil & Germany in Nov 2013
•June 2013 in Spain
Comments on Financials
•Strong cash flow positive business
• Valuations of around 16x-18x next yr earnings could be fair value
•Margins higher for Agency model
•Vehicle pooling costs are capitalized on Balance sheet for those vehicles which are not sold
• Margins could improve with time if more principal business shifts to online & off-shore location start performing
• ESPO/Stock Compensation eating away margin in income statement. Be careful of dilutive effect from them.
•Margin better than competitor
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