(Ticker Symbol on NYSE: CPRT)
Copart, Inc. is a fantastic business with a moat from high barriers of entry and a network effect. The company hosts online salvage car auctions. In other words, it takes junked cars and auctions them for insurance, auto dealer, and car rental companies. Buyers are rebuilders, licensed dismantlers, used car dealers and exporters.
Think of an auto insurance company like GEICO. GEICO’s customers get into car accidents all the time, and when the cost of repair is higher than the value of the car, GEICO writes a check to the insured and sells the junked car through Copart. So, Copart is like the eBay of salvage cars. The company gets paid a specific fee or a percentage of the sales price.
Copart has an enormous market share because of its size. Insurance companies operate nationally and it is easier for them to deal with Copart because Copart owns salvage yards all over the country. When insurance companies have salvage cars, they can cheaply deliver them to Copart’s local salvage yards. Independent salvage yard owners cannot possibly compete. Copart went public in 1994 in order to buy up as many salvage yards as possible to gain scale. This allowed it to better serve insurance companies and other large sellers of junked cars. It worked so well that since the company went public, the stock price increased more than one hundredfold. I highly encourage everyone to read founder Willis Johnson’s book, Junk to Gold, which is about the history of the company and his own journey.
Over the last five years, Copart’s return on equity has been between 22 and 42 percent. Net margins have been between 19 and 33 percent. Because of the coronavirus, the company’s stock went down 44 percent. Recently, it recovered some. With its strong balance sheet, it should be able to weather the storm. Right now, many people are staying at home and thus not getting into car accidents as much, but this is temporary. Copart has a market capitalization of $17 billion. It is trading for a P/E ratio of 23.