This Used Car Empire is Shifting Into Overdrive

Most investors don’t know it, but wholesaling used cars is a red-hot business.

Since 1982, Copart Inc. (CPRT) has been in the business of remarketing fleet, dealer, reprocessed and salvaged vehicles. A company that began on a single lot in California is now a global enterprise.

That business is about to get even hotter.

No need to spend all day at the car dealer anymore. You can attend online auto auctions and get a treasure that was relegated to the trash heap. And Copart is making a mint in the meantime..

Twenty years ago, the used car business consisted of trade-ins. Buyers traded their old car for a new one. And then the dealer put it at the back of the lot, or wholesaled it at a small local auction.

It was an ecosystem with many dealers, mechanics and guaranty insurers. Each got their piece of the pie.

Other vehicles came from rental companies. The rest were salvaged from insurance companies after accidents or natural disasters. These sellers were motivated to liquidate their inventory as quickly as possible.

In the early 1980s, Willis Johnson had a bright idea. He started Copart to consolidate the transactional parts of this fragmented ecosystem. A decade later, the company had four northern California lots.

In 1997, as the internet fervor hit full throttle, Johnson veered toward information technology. For the first time, large networked inventories were viewable. Reports were available. A year later, the Copart Auction System meant that buying and selling entire fleets of rental vehicles was a few mouse-clicks away.

The system was revolutionary. So much so that, in 2003, Copart stopped selling cars at live auctions so it could focus on internet auctions.

In its 2004 10-K filing with the Securities and Exchange Commission, Copart managers laid out a grand vision for the future. The company would continue to acquire auction sites, but defer buyers and sellers to its internet virtual bidding system.

Sites were snapped-up in Oregon, Ohio, Alaska, Montana and Toronto, Canada. Sales swelled to $400.8 million. Profits were $124.8 million. Better still, its sellers, mostly insurance companies, received better prices because virtual bidding boosted the number of potential buyers.

Copart managers built a purely transactional business in the model of Visa (V) and eBay (EBAY).

Most vehicles are sold on consignment. The company collects a fee for the auction and value-added services like towing, processing and storage. And because the company has so many auction locations, plus best-in-class IT infrastructure, choosing Copart is a no-brainer for most large sellers.

Managers have aggressively pursued national and regional supply agreements from insurers, fleet operators, banks, leasing companies and auto dealers. They have also continued to acquire strategically located auction sites, both in the U.S. and internationally.

The business is accelerating away from the competition.

Today, the Copart platform has 750,000 members in over 170 countries. It has operations at 200 locations, in 11 countries, and offers 125,000 vehicles available for auction every day. Last year, it sold more than 2 million vehicles. And there is no end in sight for growth.

Statista, an online data analytics company owned by Dell Technologies, reports that there were 13 million traffic crashes in the U.S. in 2016. That number is on the rise because people are driving more miles, and they are more distracted.

It’s a strange phenomenon: Cars are becoming safer, yet accidents, and especially fatalities are rising, leading to even more total write-offs by insurers.

All of this plays to Copart’s strengths.

Copart’s revenues have gained 57% over the past five years, and its stock is up almost 35% just this year.

The company is collecting a series of lucrative fees every time a salvaged vehicle hits one of its many lots.

In May, the company reported third-quarter financial results. Sales soared 27% to $478.2 million. Income rose 40.6% to $127.3 million. The top-line result put sales at $1.4 billion for the first nine months of fiscal 2018. That’s 26% ahead of the pace set a year ago. And its revenues are 57% ahead of where they were in 2012.

Since 2003, Copart shares have advanced an average of 23.4% annually. They are up 34.8% in 2018, driving a market capitalization of $13.5 billion. Even at 37x trailing earnings, this is definitely a stock for your radar.

Best wishes,
Jon D. Markman

 

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Comments 4

  1. Earl Greer June 18, 2018

    Jon, as self-driving cars replace current cars people will be trading in their old cars for the new technology. Thus, the price of used cars will go down because nobody will want them. Self-driving cars aren’t perfect, their robots are just better drivers than we people are. Accident rates will go down. Soon everyone will want these new cars, where you never have to worry about an accident or a traffic ticket. For a short time, insurance companies will make a killing as more and more people are not killed. Road humps will become obsolete. Photo-enforced red lights will be obsolete. The value of used cars will plummet.

    Best wishes.

    Reply

  2. Stephen June 19, 2018

    Clearly distracted driving is a major event on roadways today. I just witnessed an accident a few days ago where both drivers appeared to be on their phones and because in our duristiction it’s illegal to drive and text, phones are held on laps in the car and drivers eyes are completely off the road.
    It appears self driving cars are the only thing to save us . They are coming , soon. This advancement will surely reduce accidents, insurance claims and insurance fees . Will this development crimp sales volume for Copart, over time ? Is it possible fleet management characteristics will be impacted too , seeing many fleets disappear as auto pilot Uber like fleets proliferate ? The whole transportation industry could be a hotbed for innovation and disruption with whole sub sectors disappearing or being hugely reduced in importance – auto body repair-shops DIY parts retail chains , with electrification of cars and trucks , gas stations and their convenience store sales , the changes in real estate uses in large cities etc. There must surely be huge opportunities in the 21st Century transport vision.

    Reply

  3. Phil June 19, 2018

    Is this a GOOD idea? Junk cars – some of which may have buried in salt water, or suffered major structural damage are being peddled to the public? Do they carry salvage titles, or whey moved state to state to sanitize the titles?
    If any of the above are true they should be prosecuted!

    Reply

  4. FRANK ELLISOR July 9, 2018

    I enjoyed reading the articles on your site. As an ATTORNEY and INVESTOR I am always looking for ways to make money. Best Wishes FG Ellisor. Houston, Texas and Cary, North Carolina.

    Reply