Copart Stock: Online Automotive Auction Market Leader (NASDAQ:CPRT)

In this analysis, we analyzed Copart, Inc. (NASDAQ:CPRT), the online automotive auction company, and its market positioning compared to its competitors IAA (IAA), KAR Auction Services (KAR), and ACV Auctions (ACVA). We also determined whether it has a competitive advantage by comparing its number of locations and facilities size relative to its competitors. Moreover, we then examined its revenue breakdown by its U.S. and international segment to analyze its growth as it expanded into overseas markets. Finally, we compared the company with its competitors in terms of profitability including gross, net and FCF margins to determine whether it has an advantage over competitors.

Solidifying Market Leadership of Online Automotive Auction Market

The automotive auction market is split into whole car auctions and salvage auctions according to Report Linker. S&P Global Mobility data showed that the average age of used vehicles had increased over the past decade to 12.2 years in 2022 from 10.9 years in 2011, an increase of 12%. Additionally, the total loss as a percentage of total claims had increased from 14.1% in 2013 to 18% in Q1 2022 according to IAA’s investor presentation. We believe this could benefit vehicle auction companies including Copart in terms of supply.

Moreover, in terms of demand, the used car market is forecasted to grow at a CAGR of 6.1% through 2030 to Grand Market Research. Additionally, the motor vehicle parts market is forecasted by the Business Research Company to grow at a CAGR of 9.1% through 2026. Thus, we believe the market for used cars and auto parts could benefit automotive auction companies like Copart.

Additionally, the scrap metal recycling market is forecasted to grow at 5.5% CAGR to 2031 fueled by the limited availability of earth metals according to Fact.MR. Also, the Bureau of International Recycling stated that 40% of steel production is made from scrap metal which highlights its importance of it in metal production. Based on this, we believe this could benefit the automotive auction market with an increase in demand for scrap metal. Based on its annual report, Copart provides a platform for sellers to dispose of or liquidate vehicles to domestic or international buyers. The majority of Copart’s sellers are insurance companies, which consisted of 77% of the total number of vehicles processed in FY2021. Besides that, Copart sources from

banks, finance companies, charities, fleet operators, dealers, vehicle rental companies and individuals

Copart’s largest group of vehicle buyers are vehicle dismantlers, who sell to used car dealers, rebuilders or consumers. Furthermore, vehicle rebuilders and vehicle repair licensees purchase salvage vehicles to repair and resell, while used vehicle dealers purchase recovered stolen or slightly damaged vehicles for resale. Its end consumers are consumers for personal use and manufacturers. Overall, we summarized the buying and selling process of auctioned vehicles of Copart in the chart below.

Next, we calculated the company’s market share in the US-based on selected companies in the Online Automotive Auction Market including IAA, KAR and ACV. Copart is the market leader with a 37.7% market share among the 4 companies. Motor vehicle salvage dealers are required to go through complicated processes such as obtaining salvage dealer licenses and demonstrating compliance with certain environmental regulations. Thus, we believe there is a high barrier to entry into the market.

Furthermore, in the comparison with its competitors, Copart has the highest 9-year average revenue growth rate of 13%, compared to IAA at 11% and KAR at 7%. In addition to its superior revenue growth, it has the highest number of locations (370) and size (9,500 acres), the highest among its competitors.

Company	Number of yards/ locations	Total Acres	9-year Average Revenue Growth %
Copart	370	9,500	13%
IAA	221	9,000	11%
KAR	74	5550	7%

Source: Copart, IAA, KAR, Khaveen Investments

Additionally, Copart has more than 750,000 members and more than 250,000 vehicles for sale, providing customers with a wide selection of vehicles. Additionally, Copart announced a partnership with CHAMPtitles in 2021, which offers services to process and sell salvage and clean title vehicles to the end users including vehicle dismantlers, dealers, rebuilders and exporters.

Revenue Projections ($ mln)	2019	2020	2021	2022F	2023F	2024F	2025F	2026F
Service Revenue	1,756	1,947	2,292	2,860	3,209	3,569	3,934	4,296
Growth %	11.23%	10.90%	17.71%	15.80%	12.21%	11.21%	10.21%	9.21%
Vehicle Sales	286	258	401	630	702	777	851	923
Growth %	26.01%	-9.75%	55.03%	22.07%	11.55%	10.55%	9.55%	8.55%
Total Revenue	2,042	2,206	2,693	3,490	3,912	4,346	4,784	5,219
Total Growth %	13.09%	8.01%	22.08%	29.61%	12.09%	11.09%	10.09%	9.09%

Source: Copart, Khaveen Investments

Overall, Copart is the market leader in the online automotive auction market with the highest market share of 37.7% in 2021 and we believe its competitive advantages are supported by its number of locations and size which is the highest among competitors. We projected its revenue growth in FY2022 based on its prorated Q1 to Q3 segment revenue and based its revenue projection beyond FY2022 on its past 9-year average segment revenue growth but tapered down by 1% as a conservative estimate to derive a 5-year forward average total revenue growth of 14.4%.

International Expansion Efforts Outpaced by Stronger US Growth

Copart had made effort to expand internationally with its first expansion in 2003 in Canada and further expanded into the UK in 2007. Copart also has facilities across the US, Canada, UK, Brazil, the Republic of Ireland, Germany, Finland, the U.A.E., Oman, Bahrain, and Spain.

Additionally, Copart claimed that the company is the first vehicle auction company that offers auction sounds in six global languages including Spanish, Arabic, Russian, Polish and French-Canadian. In 2021, the company further expanded in the UK with its new CashForCars platform.

Copart Revenue by Region ($ mln)	2013	2014	2015	2016	2017	2018	2019	2020	2021	Average
United States	826	894	903	1,016	1,193	1,491	1,657	1,861	2,272
Growth %	12.9%	8.2%	1.0%	12.5%	17.4%	25.0%	11.1%	12.3%	22.1%	13.6%
International	220	270	243	252	255	315	385	345	420
Growth %	14.4%	22.4%	-9.9%	3.8%	1.0%	23.5%	22.5%	-10.5%	21.9%	9.9%
Total	1,046	1,164	1,146	1,268	1,448	1,806	2,042	2,206	2,693
Growth %	13.2%	11.2%	-1.5%	10.7%	14.2%	24.7%	13.1%	8.0%	22.1%	12.8%

Source: Copart, Khaveen Investments

In 2021, Copart derived 84.39% of its revenues from the U.S. and 15.61% from the international markets. However, the share of U.S. revenues for Copart has consistently increased over the past 10 years as its U.S. revenue growth (13.6%) outpaced its international segment growth (9.9%).

Compared to the US, there is a more limited number of vehicle sellers in the UK as stated by Copart. Instead of selling cars to Copart’s typical buyers, insurance companies in the UK prefers Copart to adopt a 1P model by taking ownership of its salvage vehicles and this would indicate that Copart’s vehicles could become obsolete. Subsequently, Copart might require additional working capital to mitigate the inventory risk. Additionally, Copart highlighted the increasingly competitive market environment, particularly in the UK.

Therefore, considering the potential challenges the company faces expanding overseas including the limited number of vehicle sellers and the lack of long-term contractual commitments, we expect the company’s revenue growth from its international segment to continue to remain below the company’s average total revenue growth as its U.S. segment had driven its revenue growth in the past 10 years (13.6%).

Superb Profitability Margins

Moreover, we compared and analyzed the company with its competitors, IAA and KAR, based on its profitability margins including gross, net and FCF margins.

Company	Gross Margin (5-Year)	SG&A expenses % of Revenue (5-Year)	Net Margin (5-Year)	FCF Margin (5-Year)
Copart	46.43%	10.45%	29.17%	14.29%
IAA	38.15%	9.80%	13.88%	11.95%
KAR	42.85%	24.44%	7.09%	5.44%
Average	42.48%	14.90%	16.71%	10.56%

Source: SeekingAlpha, Khaveen Investments

Based on the table above, Copart has a higher 5-year average gross (46.43%) and net (29.17%) margin compared to IAA and KAR. In terms of its SG&A expenses, Copart has a higher SG&A as a % of revenue than IAA (9.8%) but lower than KAR (24.4%). These online automotive auction companies do not incur R&D expenses as they operate with lean business models providing services for salvage cars. Overall, these 3 companies have an average gross and net margin of 42.5% and 16.7%. We believe its high gross margins are attributable to the industry’s high barriers to entry as discussed in the previous point above. In comparison, the used car dealer market had an average gross margin of 13.4%.

Furthermore, Copart has a higher FCF margin than IAA and KAR with a 5-year average of 14.29% compared to the average of 10.56%. However, its capex as a % of revenue had been increasing in the past 5 years from 11.89% in 2017 to 17.20% in 2021 as the company expanded with yard acquisitions in both US and International markets. Also, we believe this could suggest that Copart might not be very efficient in terms of converting its capital expenditure to generate revenue.

Based on the chart below, Copart had stable average revenue growth of 16.41% over the past 5 years. The stable gross margin and improving net margin indicate the ability of Copart to generate net profits increasingly with an average of 46.4% and 29.2% respectively.

Overall, as we expect the company to remain competitive with its market leadership, vast network and scale, we believe it could continue to maintain its solid profitability and forecasted its gross and net margins at a 5-year forward average of 50.5% and 34% respectively.

Risk: Threat of Substitute Products with Regulation on Product Repair

In 2021, the U.S. administration signed an executive order for the Federal Trade Commission to make third-party product repair easier for US consumers. The Repair Association has several policy objectives including “making information available, making parts and tools available, allowing unlocking and accommodate repair in the design.” We believe this regulation could impact Copart in terms of product substitution where automotive manufacturers could potentially manufacture and provide spare car parts which would compete against used car parts. Customers might choose to go for new car parts instead and ultimately lowering the demand for salvage or used car parts customers.

Valuation

Based on the chart below, Copart’s operating cash flow has been positive over the past 10 years. The company only had negative free cash flow in 2013 due to a large capex of $208 mln consisting of lease buyouts, opening and improving facilities, software development and purchasing equipment. Also, $84 mln from its capex was for acquisitions such as Salvage Parent, Inc. Overall, its FCF margin had increased to 19.3% in 2021.

We valued the company with a DCF analysis as we expect the company to continue generating positive FCFs. For its terminal value, we based it on the average EV/EBITDA of its competitors in the automotive auction market at an average of 18.38x.

Based on a discount rate of 9.1% (company’s WACC), our model shows its shares are undervalued by 25.4%.

Verdict

To conclude, Copart is the automotive auction market leader with a 37.7% market share and we believe its competitiveness could be supported by its number of locations and facilities size which is the highest among competitors, thus we projected it to have a 5-year forward average total revenue growth of 14.4%. Moreover, we believe its growth to remain driven by its home market with the higher revenue growth of its U.S. segment (13.6%) compared to its international segment (9.9%) as we see it facing greater competition and limited sellers in overseas markets. Finally, we determined that the company has solid profitability compared to its competitors with the highest margins and we expect it to remain stable going forward with its market leadership, network and scale.

Overall, we rate the company as a Buy with a target price of $138.47 as its stock had declined by 25% YTD.