Company Overview: Copart, Inc. (NASDAQ: CPRT) was founded in 1982 and is a worldwide leader in online vehicle auctions. The company’s advanced technology and online auction program bridge the gap between sellers to greater than 750,000 Members in more than 170 countries. The company provides services to process and sell salvage and clean title vehicles to dealers, rebuilders, dismantlers, exporters and, even to end-users. The company is engaged in selling vehicles on behalf of banks, insurance companies, finance companies, fleet operators, dealers, and individual owners. The company has more than 125,000 vehicles available online on an everyday basis.

CPRT Details

Geographical Expansion & Buyout Synergies Aid CPRT: Copart, Inc. (NASDAQ: CPRT) is a global online auto auction company with a market capitalization of ~$25.29 billion as on 03 March 2021. Despite the global pandemic, the company seems on track as its business has been recognized as essential in nature by most of the jurisdictions and government agencies. Since its inception, the company has supported and leveraged technology, which enables CPRT to serve its customers to achieve superior results in a better manner.

During the pandemic, the company built and implemented to its facilities an in-house SMS-enabled Virtual Queue product. This permitted the customers, members, and service providers to look out for service in the security of their own vehicles as a substitute for a crowded office. The company has maintained a moderate balance sheet. In doing so, it invested more than $600 million in FY20 and added 2,000 acres of owned land to its portfolio. The company has also expanded the size of its undrawn revolving credit facility to $1.05 billion in the period of uncertainty.

Recently, the company informed the market that it has added auction sounds to its website in five more languages, namely, Spanish, Polish, Arabic, French-Canadian and Russian. Previously the auction sound was only available in English. The move is in-line with the company’s strategies to augment car buyers who converse in non-English languages, thus adding to its customer base. It is worth mentioning that the company’s enthusiastic presence in the United States and international markets is expected to boost its financial performance, going forward. Further, the company expects revenue to be positively impacted, given its expansion strategies and digital ramp up. The company had unveiled Copart Max, an industry-leading product suite with enhanced digital abilities. Notably, CPRT’s patented technology will enable an additional cost-effective sale of vehicles.

Over a period of 4 years, starting from FY16 to FY20, the company has reported a revenue CAGR of 14.8%. Also, the company witnessed a 4-year CAGR of 26.8% in its net income over the same period. The company has also reduced its total debt from $640.5 million in FY16 to $397.8 million in FY20, depicting sound financial health.

Glimpse of Past Trends in Key Financials (Source: Company Reports)

The company has an established track record of effectively acquiring and integrating facilities. Since becoming a public company in 1994, the company has remained on track to complete several acquisitions of facilities in the U.S., Brazil, Canada, the U.A.E., the U.K., Germany, Finland, and Spain. Given the robust e-commerce activities and expansion of its network, the company’s strategic acquisitions are also likely to drive revenues, going forward. The acquisition of Kentucky-based online auctioning platform, Vincent Auto Solutions bolstered CPRT’s footprint in Western Kentucky and is expected to garner additional revenue source.

2QFY21 Key Financial Highlights: During the quarter, the company reported adjusted earnings per share of 80 cents, which was higher than the year-ago number of 64 cents. The results were positively aided by increasing service revenues across markets served by the company and growing network of facilities. Service revenues for the quarter stood at $532.6 million, up from $510 million reported in the year-ago period. In 2QFY21, the company reported total revenues of ~$617 million, up 7.3% year over year. While service revenue accounted for nearly 86% of total revenues, vehicle sales totalled $84.4 million during the quarter, up from the year-ago figure of $65.1 million. In 2QFY21, gross profit came in at $307.5 million, up 18.3% year over year. Total operating expenses were down to $358.8 million from the $365.2 million reported in the year-ago period. Operating income during the quarter came in at $258.2 million, up from $209.9 million reported in the previous year. Net income during the quarter also went up by 14.7% year over year.

2QFY21 Key Highlights (Source: Company Reports)

Liquidity & Balance Sheet Details: The company exited the quarter with cash and cash equivalents of $616.4 million (as of Jan 31, 2021). Long-term debt and financing-lease obligations came in at $402.7 million at the end of the quarter. During the six months ended January 31, 2021, the company recorded net cash flow from operating activities of $393 million, up from the prior period’s figure of $356.9 million. For 2QFY21, Gross, EBITDA and net margins stood at 49.8%, 47% and 31.4%, higher than the industry median of 38.6%, 16.1% and 4.4%, respectively. In 2QFY21, debt to equity stood at 0.14x, lower than the industry median of 0.74x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 41.71% of the total shareholdings, while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc., and Johnson (Willis J) are holding a maximum stake in the company at 9.48% and 6.94%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: On the flip side, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, CPRT’s revenue, profitability and future growth rate are significantly reliant on a limited number of major vehicle sellers. Hence, any substantial loss of one or more of these major sellers might adversely impact the company’s financial position. Also, the company is exposed to risks relating to foreign operations that are required to be addressed from time to time. The company faces stiff competition from peers, which add to the woes. CPRT’s long-term debt of $402.7 million as of January 31, 2021, may limit growth, and any further increase in borrowings might worsen its risk profile.

Outlook: The company opines that virtual auction platform boosts the pool of available buyers for each sale. This, in turn, is expected to improve the efficiency of the company’s operations by reducing the expense and capital requirements that would be linked with holding live auctions. Rapid progress in artificial intelligence and machine learning are expected to drive the company’s business prospects, going forward. The company’s focus to maintain cash liquidity and take necessary actions to stay afloat in this difficult time, will give it a competitive advantage and will aid the company to come out stronger in the long run. Further, considering the changing dynamics, the vehicle and auction companies have witnessed a drastic change in the business models. Thus, the company’s transformation strategies to stay ahead in this ever-changing environment will strengthen its position, going forward.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~5.5%. The stock made a 52-week low and high of $55.69 and $130.96, respectively. On the technical analysis front, the stock has a support level of ~$102.01 and a resistance level of ~$112.3. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at some premium as compared to its peers median, considering the robust results for 2QFY21, resilient business, acquisition synergies, geographical diversification, and growth prospects. We have taken peers like IAA Inc (NYSE: IAA), Monro Inc (NASDAQ: MNRO), to name a few.  Considering the company’s decent 2QFY21 performance, international expansion, encouraging outlook, decent liquidity position and valuation, we give a “Buy” recommendation on the stock at the closing price of $107.01, down by 2.34% on 03 March 2021.  

CPRT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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