Copart is a leading remarketer of salvaged vehicles in the U.S. and around the world. The company operates a network of salvage yards (10k+ acres) used to store vehicles before they are put up for auction on Copart’s online bidding platform called VB3. According to the company’s website, Copart has 265k+ cars available daily for auction stored at their 200+ salvage yards and sells 3M+ vehicles each year to buyers from 190+ countries.
Thanks for a well articulated and researched piece Hamilton. One question - I didn't understand the right to win in international geos? There is network effects and location of yards advantage in US, I assume one can put in capital initially (1P model rather than 3P) and create liquidity for network effects to kick in, but if the yards are an important part of the moat puzzle then with getting in late into the geography, would Copart have cheap access to attractive yard locations? Also, have they broken down economics of international ops? Thank you.
You're right that the yards in the U.S. are an important part of the company's moat. Copart is heavily investing to replicate that model in the U.K. and Germany. I guess I would say the one advantage they bring when expanding is the international buyer base, which allows them to achieve liquidity in new markets faster. Also, I'm not sure if there are many other competitors of size in the new regions that they are entering, so they may still have a leg up if they expand quickly enough. The company does break out financials of U.S. vs. International.
Thanks for the brilliant analysis. One question - how will the EV trend influence the thesis? I guess the lifecycle for a vehicle would go down and residual value of an EV may go up as battery materials are quite expensive and some metal recycling companies may come to the field?
Thanks Luke. I'm not sure about the lifecycle but the company has stated that EVs outperform ICE vehicles at auction due to the materials in the car and the repairs are more costly so severity is high.
From the 2021 Q3 earnings call
"In short, the electric vehicles outperform the average combustion engine vehicle at auction. The returns are meaningfully higher. I think that the root cause of that I think may well be that electric vehicles tend to be cars with a lot of sensors, a lot of technology on the perimeter, more exotic materials in the car to lower the weight and so forth. So, in many cases, they total more easily. But the returns we generate at auction are some of the highest that we achieve for any kinds of vehicles we sell. So I think the total loss proposition is promising there. I think the repairs are difficult. So severity tends to be high. Our repair infrastructure, the handful of public companies you know as well as the extensive mom-and-pop network around the US that the insurance carriers rely on – the US, UK, Canada everywhere that the insurance carriers rely on, in most cases, are well-equipped to manage repairs of combustion engine vehicles, not yet so for electric car. So, if anything, I think that's a tailwind in our favor in that severity will prove to be more extreme still for electric cars."
Thanks one more time for the brilliant analysis. I was re-reading it and cannot get over the puzzle of the company's ROIIC. Given that Copart spends around 80% - 85% of it's capex budget on land acquisition and development and the fact that the CFO says that the cap rate on these land investments are hardly above WACC (which I assume is nowhere near 10%) - how does the company still manage to get enormous returns of 35% - 60% on it's capital? I'm clearly missing something!?
Yes, that is the case because the base of its existing yards are much larger than the incremental yards that they're adding each year. New yards are likely low ROI in the near term, but over time, the yards do generate higher returns due to the tailwinds of the industry, better cost management (from increased density in a region, operational efficiency), and operating leverage from scale.
Hi Hamilton, very nice analysis, thanks much! I found CPRT via CACC's shareholder letters, where Mr. Tom Tryforos, one of CPRT's director, was mentioned. I'd like to read the Forbes article and the book. Btw, assuming more catastrophic events hit in the future, how would that impact the performance of CPRT and IAA? Maybe I miss it somewhere, have you touched on the overal growth rate for the whole industry? Looking forward to your insights and thanks! Happy new year! -Dunyu, TX.
Thanks. Catastrophic events tend to be margin dilutive initially but each event is different. Copart is happy to provide their services during these events as its an important part of their partnership with the insurance carriers.
Thanks for a well articulated and researched piece Hamilton. One question - I didn't understand the right to win in international geos? There is network effects and location of yards advantage in US, I assume one can put in capital initially (1P model rather than 3P) and create liquidity for network effects to kick in, but if the yards are an important part of the moat puzzle then with getting in late into the geography, would Copart have cheap access to attractive yard locations? Also, have they broken down economics of international ops? Thank you.
You're right that the yards in the U.S. are an important part of the company's moat. Copart is heavily investing to replicate that model in the U.K. and Germany. I guess I would say the one advantage they bring when expanding is the international buyer base, which allows them to achieve liquidity in new markets faster. Also, I'm not sure if there are many other competitors of size in the new regions that they are entering, so they may still have a leg up if they expand quickly enough. The company does break out financials of U.S. vs. International.
Thanks for the brilliant analysis. One question - how will the EV trend influence the thesis? I guess the lifecycle for a vehicle would go down and residual value of an EV may go up as battery materials are quite expensive and some metal recycling companies may come to the field?
Thanks Luke. I'm not sure about the lifecycle but the company has stated that EVs outperform ICE vehicles at auction due to the materials in the car and the repairs are more costly so severity is high.
From the 2021 Q3 earnings call
"In short, the electric vehicles outperform the average combustion engine vehicle at auction. The returns are meaningfully higher. I think that the root cause of that I think may well be that electric vehicles tend to be cars with a lot of sensors, a lot of technology on the perimeter, more exotic materials in the car to lower the weight and so forth. So, in many cases, they total more easily. But the returns we generate at auction are some of the highest that we achieve for any kinds of vehicles we sell. So I think the total loss proposition is promising there. I think the repairs are difficult. So severity tends to be high. Our repair infrastructure, the handful of public companies you know as well as the extensive mom-and-pop network around the US that the insurance carriers rely on – the US, UK, Canada everywhere that the insurance carriers rely on, in most cases, are well-equipped to manage repairs of combustion engine vehicles, not yet so for electric car. So, if anything, I think that's a tailwind in our favor in that severity will prove to be more extreme still for electric cars."
Thanks for the detailed answers, very helpful!
Thanks one more time for the brilliant analysis. I was re-reading it and cannot get over the puzzle of the company's ROIIC. Given that Copart spends around 80% - 85% of it's capex budget on land acquisition and development and the fact that the CFO says that the cap rate on these land investments are hardly above WACC (which I assume is nowhere near 10%) - how does the company still manage to get enormous returns of 35% - 60% on it's capital? I'm clearly missing something!?
Yes, that is the case because the base of its existing yards are much larger than the incremental yards that they're adding each year. New yards are likely low ROI in the near term, but over time, the yards do generate higher returns due to the tailwinds of the industry, better cost management (from increased density in a region, operational efficiency), and operating leverage from scale.
I see, makes sense. Thanks!
Hi Hamilton, very nice analysis, thanks much! I found CPRT via CACC's shareholder letters, where Mr. Tom Tryforos, one of CPRT's director, was mentioned. I'd like to read the Forbes article and the book. Btw, assuming more catastrophic events hit in the future, how would that impact the performance of CPRT and IAA? Maybe I miss it somewhere, have you touched on the overal growth rate for the whole industry? Looking forward to your insights and thanks! Happy new year! -Dunyu, TX.
Thanks. Catastrophic events tend to be margin dilutive initially but each event is different. Copart is happy to provide their services during these events as its an important part of their partnership with the insurance carriers.
it's a small thing compared to the great content, but i appreciate the layout/structure !
Appreciate it! Thanks for reading.