Is Copart Stock a Buy?

Amid surging demand and supply shortages, the automotive market as a whole has had an extremely turbulent two years.

 

While investors have paid careful attention to parts suppliers and automakers, the salvaged auto market remains largely overlooked.

 

The largest player in this space is Copart (NASDAQ:CPRT) so is Copart stock a buy? 

Copart provides auction services for salvage vehicles. The company’s main business model involves selling salvage vehicles sourced from insurance and rental companies to dismantlers and used car dealers. Copart also facilitates sales between individuals through its website.

 

In the most recently reported quarter, Copart saw an 18 percent increase in global revenue and a 14.2 percent increase in service revenue. Total revenue was $883.4 million, while net income was $263.7 million.

 

In large part, these increases were driven by higher average selling prices. It’s worth noting, though, that Copart achieved these results in spite of challenges related to currency exchange rates.

Earnings for the quarter totaled $1.13 per share, beating out the analyst consensus estimate of $1.08. The quarter was also an improvement over the same period in 2021, when Copart reported EPS of $1.03. Total revenue for the trailing 12-month period was $3.5 billion, 30 percent higher than the previous year.

 

One particularly encouraging sign for investors is Copart’s net margin, which as of July stood at 31.1 percent for the trailing 12-month period. This is near a 10-year high for Copart, showing how well the company has performed amid higher vehicle prices.

 

While margins may shrink somewhat when used car prices return to normal, it’s likely that Copart will remain quite profitable for the foreseeable future.

 

Together, the trends of high margins and rising revenues give Copart significant growth potential. Although current market conditions won’t last indefinitely, Copart has successfully capitalized on the opportunities presented by vehicle price volatility.

 

Analysts are fairly bullish on Copart, with the median price forecast for the stock sitting at $142. This represents a gain of over 23 percent from the current price of $115.10.

 

In spite of economic conditions, it’s also worth noting that all standing price forecasts anticipate Copart stock rising over the next 12 months. The lowest price forecast is $131, while the highest is $182.

 

Copart also appears to be fairly valued. While its price-to-earnings ratio of nearly 25 is slightly high, the company’s 5-year projected growth rate of 22.3 percent more than justifies it. Copart generates a respectable $5.11 of cash flow per share, markedly higher than the industry average of $3.70.

 

Copart appears to be a relatively safe company, enjoying a competitive advantage in a relatively niche business. The company has also achieved a near-zero debt level, allowing it to operate without the expenses and constraints of servicing creditors. This lack of debt extends to its real estate holdings, of which it owns 90 percent outright.

 

One risk factor Copart is subject to, though, is that of a general slowdown in used car sales. Following two years of sky-high prices for both new and used vehicles, a deceleration in buying has started to drive down costs.

 

Copart, along with other companies tied to the used vehicle market, could see lower margins and lower earnings as prices fall. This risk, however, is probably moderate. With chip shortages still in effect, demand for used cars will likely remain relatively high.

 

As noted in the most recent earnings call, a lack of vehicle availability has also made insurance companies less likely to total out damaged vehicles. This has driven down Copart’s available pool of inventory from total loss settlements. Over time, however, management expects that this trend will reverse itself.

 

A final challenge for Copart and other auto businesses is the rapid increase in interest rates that has taken place in 2022. With financing now costing more than it has in many years, consumers may be more likely to keep their old cars for an extra year or two.

 

This general slowdown in buying activity could weigh on Copart. Thanks to its focus on used cars, though, the company should see less damage from rising interest rates than businesses engaged in selling new vehicles.

 

While Copart may not be a flashy, high-growth tech stock, there’s a good deal to like about this well-established business. With total loss settlements from the insurance industry on a long-term upward trend, Copart’s business could remain quite stable for years to come.

 

One of the more positive aspects of Copart is the fact that it seems to have a decent moat. The salvaged vehicle business is fairly lucrative but also difficult to break into. As such, it’s unlikely that Copart will be unseated by new competition. Copart’s scale and high margins would also make it difficult for a smaller competitor to replicate its success.

 

Retail investors may also be encouraged by Copart’s high level of institutional ownership. Investment firms own about 80 percent of the company, and inflows have significantly outpaced outflows over the last 12 months. As such, it seems that institutional investors are reasonably confident in Copart’s future prospects.

 

Certainly, Copart does face some short-term challenges related to the current state of the auto industry. Given its moat and lack of debt, however, there’s little reason to believe that these challenges will pose a significant long-term threat to the business.

 

Taking all of this into account, Copart seems to be a moderate buy and may be well-suited to relatively conservative investors.

 

While there are certainly stocks that have a chance to deliver higher returns when the market recovers, most of them carry much higher risk levels than Copart.

 

With a projected upside of over 20 percent, a fair valuation, good growth prospects and very little debt, Copart appears to be a relatively safe stock that could deliver healthy returns for investors.

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