Copart works mostly on an agency model, meaning that most of the time Copart will make money through auction fees (vehicle purchasing fee, listing fee, selling fee, transportation fee, storage fee, etc). Basically, it’s an online two-sided marketplace with a physical presence.

In a minority of the cases (10%), especially in the UK, Copart will work on a “principal” model where it buys the car from the previous owner and sells it to the new owner. 

Just so you get a sense of the scale of this business, Copart remarkets over 3 million cars a year.

Most of the vehicle sellers are insurance companies accounting for 80% of the cars, with the remainder distributed by banks, charities, dealers, and individuals. The vehicles sold are damaged or have been stolen and consequently recovered for which an insurance settlement with the vehicle owner had already been made.

Some of the cars go on to being restored and back to the roads, but most will be bought by dismantlers, who will recycle and refurbish parts for vehicle repair. A tiny portion will be scrapped.

I found it interesting to learn that, although the majority of the auctions performed by Copart are in the US, the majority of the cars is exported around the world, as lesser damaged vehicles are attractive to foreign demand.

The company also owns ProQuote, a software that allows for insurance carriers to estimate the value of damaged vehicles.

Is it a great business?

Every business that presents a chart of its 10 year Return on Invested Capital on its investor’s presentation is likely to be a good business. Copart is one of them.

By performing the auction online, the company eliminates the expenses and capital requirements associated with performing live auctions.

Copart isn’t a monopoly, but it’s very hard to compete with as acquiring all the land would require huge amounts of capital, and leasing it would cost too much.

Another data point that speaks about the quality of this business is the positive Same-Store-Sales growth in every year since 2005 (with the exception of 2009).

“As long as we’ve got the land in the right place to put the cars on, we can’t fail. We are like the septic tanks of the sewer system. You can’t have the system without us.” Copart founder – Willis Johnson.

Where is the business heading to?

I had this perception that cars today are much safer than before and that should reduce the number of crashes thus reducing Copart’s potential business. But the truth is that the more technologically advanced cars become, the costlier it is to repair them (think adaptative headlights, computer and navigation systems, cameras, lane departure warning systems, etc). That means that, contrary to what I thought, Copart’s addressable market is increasing, not declining.

Not only that, but the average age of cars on US roads has been trending up. This is good for Copart.

So, the company will keep doing what it has been doing so far, acquiring car yards in key markets, including foreign markets; attracting more sellers; increasing the range of services it offers; and expanding the software into new markets.

How inside or outside my circle of competence is?

Copart is still outside of my circle of competence, but I don’t see why I couldn’t understand it well after a bit of research.

Are there signs that it’s undervalued?

Well… it depends. The stock is currently trading at 23 times earnings, which should be overstated by the pandemic. Just recently, it traded at 45x earnings! Oh, the perils of paying too much!

23x earnings might actually be cheap. Of course, I would like to have bought in that period between 2009 and 2016 when it was trading below 20x earnings.