Copart Junks Analyst Estimates

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Editor's note: In a previous version of this article, LKQ was incorrectly identified as a competitor to Copart. We regret the error.

There's gold in them thar junk heaps! At least that's what auto salvage operator Copart (Nasdaq: CPRT) seems to be telling investors.

Both revenues and earnings trounced analyst expectations, with sales rising 12% and earnings up 16% over last year. Wall Street's prognosticators had checked their crystal balls and saw sales falling, while expecting only a 6% increase in EPS.

A large reason for the company's performance was its United Kingdom acquisition, where it took over operations of Universal Salvage. Copart is now the largest salvage yard operator in the country, with a market share equal to 20% to 25% of the total. Universal Salvage added $14.8 million to revenues and $0.01 per share to profits.

As good as results were, management at the Motley Fool Stock Advisor recommendation says it's simply too early to extrapolate the U.K. results too far out, because Universal Salvage was within the fold for only about six weeks. Copart expects to be able to sell more junked cars than were represented by the six-week period, but also will incur additional costs that haven't yet shown up. But for all that, Copart says that the U.K. profitability is not the same as in the U.S., because certain efficiencies that exist here aren't present there.

One area, though, where the system is streamlined is in titling of the junked cars. Here in the U.S., Copart has to deal with 50 separate motor vehicle agencies, one for each state. In the U.K. there is just one titling agency for the entire island. The company also plans on expanding its Internet auction software, called VB2, to the U.K., while completely eliminating live auctions.

So the improvements Copart realized in operating margins, for example, may compress going forward as it expands internationally. Operating margins expanded from 34% to 35% as it worked off the inventory associated with hurricanes Rita and Katrina -- when there's an influx of vehicles from such storms, margins can take a hit. They worked out all of those cars by the end of the second quarter, so that the expansion being realized now is the result.

As the biggest salvage yard operator both here and across the pond, Copart can expand its industry lead over No. 2 ADESA. Investors could do worse than look for gold in junk.

Scavenge among these related Foolish articles:

• Foolish Forecast: No Junk With Copart
• Salvaging Returns With Copart
• Copart Does Its Part