One of the many interesting dynamics of investing strategies that use tools like the Small Cap Foolish 8 screen is that they often unearth interesting companies that fly well below the radar of the mainstream press and Wall Street analyst community. These companies -- such as slot machine manufacturer WMS Industries (NYSE: WMS), or business trade financing company Actrade (Nasdaq: ACRT), a recent Motley Fool Select focus company -- may be great financial performers, but they're hardly "hot."
But while that may make them more difficult to discuss with friends at cocktail parties -- as such companies are rarely widely held by so-called momentum investors piling on must-have companies -- they are no less intriguing as potential holdings. Why? First, a lack of widespread attention may mean their valuations generally do not get caught up in speculative mania such as that seen recently in the telecommunications, biotechnology, and other sectors, allowing investors good purchase points.
And second, they often highlight the genius exercised by those who can create and grow profitable enterprises without resorting to "me too" tactics, strategies, or business models by identifying and addressing real niche needs -- however obscure or mundane -- others will gladly pay to have filled. Copart (Nasdaq: CPRT), recently unearthed by the Foolish 8 screen, is an example of just that.
Copart and salvage vehicle auctions
Copart is a provider of salvage vehicle auction services. What's that mean? When an insured vehicle gets in an accident, it's generally moved to a temporary storage facility until the insurance company can send over an adjuster. The adjuster -- sounds like a 1980s action drama starring a graying Englishman, doesn't it? -- inspects the car and estimates the cost to repair it.
If that cost is more than the vehicle's "ACV," or actual cash value -- in other words, the amount someone else would be willing to pay for the remains -- the insurance company declares the vehicle a "total loss," takes title of it, and moves to auction it off to dismantlers, used car dealers, or other groups (including regular folks with a thing for getting greasy under the hood).
Copart and other salvage auction service companies essentially act as middlemen between the insurance company -- and other suppliers, such as car dealers and rental agencies, though insurance companies supplied nearly 90% of Copart's vehicles in fiscal 2000 (ended last July 31) -- and the aforementioned "someone else." They either auction the vehicles off themselves, for a fee or percentage of the take, or purchase and sell them themselves, collecting the profit.
Why are Copart investors smiling?
Now, here's a quick way to check your pulse: If it takes more than half a second to think of something sexier than salvage vehicle auction services, you don't have one. (Get help.) But the company has nevertheless produced some nice, steady returns over the last five years: Copart's shares outperformed the S&P 500 by a margin so wide The Great Leslie could drive through it with a white sash tied tightly over his eyes.
Driving those returns has been solid earnings growth. While revenues and total auction proceeds have increased by a compounded 13% and 14% annually over the last four full fiscal years, operating and net income have rocketed 27% each over that same period. As Copart has added more auction facilities to its books, it's succeeded in moving more of them toward increased "consignment" sales. (That means the company only records revenue associated with its cut of the auction sale, which is more profitable than buying and selling the vehicles itself.) In fiscal 2000, 55% of Copart's vehicle sales were through this method, up from 46% two years previous.
For the first nine months of fiscal 2001 (ended April 30), revenues rose 34%, operating income 44%, net income 40%, and total auction proceeds 26%.
Where's the cash flow?
Unfortunately, the company's cash flow statement isn't quite as pretty as the income statement. Though Copart managed to generate some free cash flow (cash from operations minus capital expenditures) over the nine months ended April 30, looking back over past years its performance in this area has been pretty uneven:
Copart T9Mo.* F2000 F1998 F1997 F1996 F1995 ---------------------------------------------------------- Free Cash Flow $3.1M -29M 7.5M -11.8M 13.4M -1.1M *Trailing nine months
Importantly, it's not the cash from operations line that's been causing this confusion: That's increased steadily over the above time period, growing nearly as quickly as net income. Rather, it's capital expenditures that have jumped around like an overcaffeinated Superball.
But that's part and parcel of Copart's growth strategy. The company hopes to continue growing nationwide, and to that end has been consistently spending to open or acquire new facilities, as well as things like software, yard and computer equipment, and vehicle transports. Though costly, this makes sense, as Copart hopes that by increasing its scope it will have a better chance at setting up exclusive service agreements with big suppliers. (In its most-recent quarter, two suppliers accounted for a total of 22% of Copart's revenues.)
And so Copart needs to be ready to jump when it sees an opening in a new market or a competing facility in a current market that could be ripe for the taking. Heck, someday it may even decide to bid on its closest direct competitor: Insurance Auto Auctions (Nasdaq: IAAI), which though possessing just over one-tenth the market value of Copart commands a similar price-to-earnings ratio, likely because of its slightly better recent track record of growing operating profits.
Good things can come in all packages
Copart is certainly an interesting company, but perhaps the best thing about it, in the end, is that it serves as a perfect illustration of the breadth and scope of the business world -- and the myriad of opportunities available for investors willing to consider companies that, while they may not be "sexy," may nevertheless help you afford that red Corvette you've been eyeing.