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Turning Rust into Gold


When Barry Rosenstein visited the headquarters of auto-salvage outfit Copart Inc. (CPRT) in 1993, what greeted him didn't scream: "Great investment!" Recalls Rosenstein: "I drove up there, and there was a junkyard, with a bunch of wrecked cars, a barbed-wire fence, and a metal building." Rosenstein, then a partner with San Francisco investment firm Genesis Merchant Securities LLC, was looking to invest in companies that could lead the consolidation of their industries, and salvage firms were a possibility--no matter how bad they looked.

But after talking with founder and Chief Executive Willis J. Johnson, now 55, Rosenstein knew he'd found a winner. Johnson shared his vision of buying up dozens of auto junkyards and forging them into a nationwide chain. Soon after, Genesis and a group of investors anted up $7 million to get Johnson rolling. Says Rosenstein: "This guy had it."

Good call. Today, thanks to years of acquisitions and the savvy use of technology, Benicia (Calif.)-based Copart has raced to the top of its industry and to No. 31 on our Hot Growth list. It commands a leading 30% share of the market for wrecked vehicles--those that insurers deem total losses. The insurer settles up with the owner, and Copart auctions off the wrecks to dismantlers, rebuilders, and used-car dealers. The insurer gets the proceeds, less Copart's share--either a fixed fee of $50 to $150 per car or a percentage of the sale price.

Copart had only three sites in 1993. Today it has 91 in 40 states. Sales in the past 12 months were $283.8 million, up 31% on average in each of the previous three years. Profits have climbed an average annual 40%, to $49.7 million in the past 12 months. Growth slowed at the beginning of this year because mild weather nationwide meant fewer car accidents. Still, sales in the three months ended Apr. 30 rose a brisk 26%, to $90.2 million, and earnings jumped 45%, to $16.6 million. Says Gary F. Prestopino, an analyst with Barrington Research Associates Inc.: "Copart is the dominant player in the industry."

A big reason for Copart's ascent has been its early adoption of the Internet. As far back as 1992, Copart gave insurers online access to its database so that they could track sales more easily. Since adding online bidding in mid-1998, the company's business has rocketed. In the latest quarter, direct online sales hit $44.5 million, and an additional $44.9 million worth of auctions involved at least one Internet bid. So even for cars bought at a physical auction, the Net helped boost bidding and prices. "The Internet has been a real tool for growing our business," says Johnson.

Yet Copart is facing slower growth. There are fewer independent salvage operators to acquire. Moreover, the rising prices that salvage companies have been able to charge insurers in recent years won't be sustainable, says Tom Hausfeld, president of the American Salvage Pool Assn. Insurance companies, battered by September 11, are resisting any price hikes. Says Hausfeld: "You're going to see a slowdown." Copart sees annual profits growing at a more sedate 18% to 22% and is moving into new auction formats, such as real-time bidding and sales open to the public, not just dealers.

You might expect that kind of resourcefulness from a kid who grew up on an Oklahoma dairy farm and learned business basics from watching livestock auctions. In his off hours now, Johnson again finds himself in the fields. But this time, those fields are at the vineyard he owns near the Napa Valley, where he indulges his hobby--restoring classic cars. By Robert D. Hof in San Mateo, Calif.


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