New, Used or Just Cruising, Copart Looks Good
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Buckle Up and Hit the Gas
Investors like companies that are poised to perform regardless of the economic environment. While performance is certainly not guaranteed, Copart, Inc.'s (NASDAQ: CPRT) business model and vision, coupled with its aggressive share repurchase program, presents an attractive investment opportunity for investors. As a best in class company in its sector, investors may consider this stock a core holding.
Successful Model Puts Pedal to the Metal
Copart provides online auctions and vehicle remarketing services in three different countries (U.S., Canada and the United Kingdom). The Dallas, TX-based company offers services to a plethora of vehicle sellers - the general public, banks, financial institutions, insurance companies, car dealerships, charities, rental companies and fleet operators - and sells its products to all types of buyers of used car parts. Whether customers are in the market for a new vehicle, or they just want to acquire parts for an existing one, Copart’s model covers a variety of customers and appears to work in most kinds of economies.
What does this mean? In the current sluggish economy, when vehicle owners need to hold onto their cars longer, the company’s parts business should outperform the new vehicle business derived from buyers and sellers. When the economy eventually improves, Copart appears poised to benefit from any increase in the new and used car market business.
Smooth Running Infrastructure
Former CEO Johnson, who founded the company in 1982, started out with one salvage yard on the west coast. Now a global auction business, more than 50,000 daily bids are made on vehicles and online auctions held for salvage vehicles - that is, damaged vehicles that are a total loss for business and insurance companies or recovered stolen vehicles post insurance settlement with original owners. By separating the salvage business from the auction business, he created two streams of mutually exclusive revenues.
The management team, now led by CEO Jayson Adair, a longtime Copart employee, has tremendous vision and moves quickly to compete with changes in technology and global markets. For instance, in 2012, the company moved its headquarters from California to Texas in order to properly serve all areas of the country. Additionally, after successfully setting up temporary locations in the hard hit areas devastated by Hurricane Katrina in 2005, they used the same plan last year to move quickly to set up shop in the northeast to deal with Superstorm Sandy. This should have a positive impact on next quarter's numbers.
Running on All Pistons
At the end of its latest quarter ended Oct. 31, the company had a strong trailing 12-month operating margin of 31%, a trailing 12-month profit margin of more than 19%, and a trailing 12-month return on equity of 32%.
With an operating cash flow of $241M and levered free cash flow of $143M, Copart has aggressively been returning cash to shareholders. Shares outstanding, currently at 125M, have been reduced by 8.9M shares under a share-repurchase program and, with estimated cash flow over the next two fiscal years of $300M, shares outstanding should be reduced even further. As of July 31, 2012, the company had 48.2MM shares available for repurchase under their share repurchase program.
Never one to rest on its laurels, the company has implemented a number of initiatives that should be in place by the end of its current fiscal year end, July 31: creating three divisional processing centers, a new auction inventory management operating system, and a newly aligned customer-service initiative. So, with a business model virtually impervious to economic cycles, business initiatives that should significantly improve its current position and an aggressive share repurchase program, the company is clearly focused on shareholder value.
Fast and Furius, Smokes the Competition
But what about its competition: CarMax (NYSE: KMX), AutoNation (NYSE: AN) and Penske Automotive Group (NYSE: PAG)? While they all have similar businesses, Copart appears to be best suited to put the "rubber on the road" to weather uncertainty.
CarMax operates as a retailer of used vehicles in the United States. It also sells vehicles that do not meet its retail standards to licensed dealers through on-site wholesale auctions, and sells new vehicles under franchise agreements. However, the company has recently exhibited weak operating cash flow, deteriorating net income and a disappointing return on equity.
AutoNation with a similar model to Copart, has been showing up on a number of buy lists, but its profit margin is significantly lower with a higher percentage of debt. While the company’s third quarter EPS rose 14% to beat the Street’s estimate by 2 cents and its revenue jumped by 15%, it still falls short of being the best in class.
Finally, Penske operates 320 franchised car dealerships in and outside the U.S., mostly in the U.K. Slim profit margins, and the lowest P/E ratio of the bunch does not rank Penske as one of the top players in the sector.
Crossing the Finish Line
Copart provides current shareholder value and a solid future evidenced by their commitment to a next gen operating system and the ability to move nimbly to capitalize on opportunities. The company's model is proof positive that moss doesn't gather on a rolling auto and auto parts company.
mjwcopywriter has no position in any stocks mentioned. The Motley Fool recommends Copart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!