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2001 BW 50



Copart: Mining Gold in Wrecked Cars
Its business is far from glamorous, but this company is in the fast lane, thanks to tidy profits from auto salvage

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Copart (CPRT ) has turned the old saying that one man's trash is another man's treasure into a booming business -- logging $254 million in revenues in 2001. Unlike the wrecked cars that the Benicia (Calif.)-based company sells for insurance companies through auctions, Copart is in the fast lane. The company, No. 2 on this year's list of best-performing companies in Standard & Poor's Mid Cap 400 index, is expected to maintain 20% to 25% annual earnings growth over the next five years.

And Copart shares arguably are cheap right now, having dropped 31%, to $16.28 in mid-March, from an early February high of $23.85 after a three-for-two split. "The stock at this level represents a good buying opportunity," says Scott Stember, a senior equity analyst at research firm Sidoti Co. in New York. Stember has a buy rating on the stock and a 12-month price target of $30.

Indeed, the recent decline is no reason for concern, analysts say: The pullback is a result of expectations getting ahead of themselves for the rapidly accelerating company. The retreat began after Copart posted higher second-quarter fiscal 2002 earnings of $0.14 cents a share, vs. $0.11 a share a year ago. These results met, but didn't exceed, Wall Street's estimates.

"LIKE A MORTUARY."  Going forward, the company says it sees earnings for the 12 months ending Apr. 30 at $0.63 a share -- a 24% jump over last year. "We believe the selling is overdone and ignores the strong growth [Copart] continues to produce," David Riedel, an analyst at Salomon Smith Barney, wrote in a Mar. 4 research note to investors. Riedel also has a buy rating on the stock and a $25 price target.

It's not as easy to get Wall Street excited about a car-salvaging company as, say, a high-profile media or tech outfit, concedes Willis Johnson, Copart's chief executive. "We're like a mortuary," he says. "We're kind of out of sight, out of mind." But Johnson, a former auto wrecker himself for 21 years before joining Copart, also knows plenty of money can be made in car carcasses (for more, see our Q&A with Johnson). "We just have to manage [the business] right."

Copart generates revenues by providing services such as towing, storing, and auctioning cars with big problems. The ones that have been totaled often go to dismantlers for parts. Damaged or stolen vehicles that still run but have been deemed a total loss for insurance or other reasons often are auctioned to used-car dealers or other buyers.

AHEAD OF THE PACK.  Although the bulk of the bids are placed in person, about 24% of the cars Copart sells are either bought by an Internet bidder or have their prices pushed up by an online bid. On about two-thirds of the cars it processes, Copart receives a percentage of the sale (ranging from 10% to 20% of the selling price, depending on the car's age), while the remainder are sold for a fixed fee.

Copart's position as the market leader in the auto-salvage services industry makes it a solid stock, analysts say. Today, its market cap stands at about $1.5 billion, and it has a 30% market share. Since going public in 1994 in a $20 million initial public offering, 22-year-old Copart has moved swiftly to expand a network that consists of 88 facilities in 39 states, and it's building or acquiring new yards at a rate of 6 to 10 a year. "We are confident that recent market-share gains in the salvage/auction business will continue, as insurance companies recognize the higher proceeds, better service, and professionalism provided by Copart," Riedel wrote in his recent report.

The industry's No. 2 company, Insurance Auto Auctions (IAAI ) of Schaumberg, Il., has a market share in the 20% range, Sidoti's Stember says. But Insurance Auto's Internet operations are less robust, says Stember. "It's stuff like this that really separates [Copart]," he adds.

BETTER NET BIDDING.  Insurance Auto says it's in the process of revamping itself to become a more formidable rival. And although Copart may have a leg up in its Web business, Insurance Auto Chief Executive Tom O'Brien says his company is "constantly improving" its Internet operation. Insurance Auto has also changed its management team and is upgrading its information technology. "We fully expect to be a very robust competitor in the business," O'Brien says.

Copart isn't idling either, though. CEO Johnson says it's looking to increase the number of cars it sells for a percentage cut to 75%, from 66% now, so it sells fewer cars on a fixed-fee basis. That move should be enhanced, Stember adds, by the recent roll out of real-time Internet bidding at some locations. Before, Internet buyers had to place their bids before the auction. "The more people you have bidding, the higher the return," Stember says.

Copart has also started expanding into car auctions for the general public. Now, access is limited to licensed dismantlers, rebuilders, and used-car dealers. Stember notes that although the public car-auction field is already crowded, Copart's "Motors Auction Group" is now in three locations, and they're all profitable.

EXPENSIVE EXPANSION.  There are some reasons for caution on the stock, however. In a Securities & Exchange Commission filing, Copart says its two largest suppliers account for 15% and 10% of its vehicles, which would put the company in a sticky spot if one of them ever bails out. Analysts say this is unlikely, however, given Copart's good reputation for service.

The second risk is that Copart's expansion costs are increasing as the company builds more facilities, as opposed to acquiring existing ones. Johnson says that sometimes current yards just aren't big enough for Copart's needs. Other times, owners don't want to sell. The additional cost of starting from scratch means "you could be looking at some margin contraction," says Gary Prestopino, a vice-president at Barrington Research Associates in Chicago. But, he adds: "They still are looking at meeting their numbers."

On the bullish side, Prestopino points out that Copart has virtually no debt and some $120 million in cash, paving the way for its continued expansion. In fact, Johnson says the company could grow to 125 facilities nationally over the next three years.

SIMPLE BUSINESSS.  And Copart's financial practices appear to be solid. "There are no accounting issues," Prestopino says. Wayne Hilty, Copart's chief financial officer, confirms that it has no off-balance-sheet transactions and no partnerships. "This is as simple a business as it gets," he says.

In the post-Enron era, that could be another reason for investors to consider the stock. Along with this one: Recessions come and go, but salvaging wrecked cars is here to stay.

MARCH 25, 2002

By Eric Wahlgren

Edited by Beth Belton

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