Copart, Inc (NASDAQ:CPRT) reported third-quarter earnings on May 26, and the auto recycler and auction-services provider turned in double-digit revenue and earnings growth. This makes two quarters in a row of solid revenue growth after a sales stall in late-2014 through 2015. Management doesn't appear ready to rest on this rebound, with the company continuing to invest in more capacity.
Here's a closer look at Copart's third-quarter results, and what management said going forward.
|Metric||Q1 2016||Q1 2015||Change|
|Earnings per share||$0.64||$0.44||45%|
What happened in the quarter
- Revenue was up 17%, largely driven by an 18% increase in service revenue. Management said that this was largely due to increased U.S. driving activity, which means increased accident rates -- hence, more scrapped cars from insurance companies going to auction.
- Scrap rates are still down about 9% since last year; however, they've rebounded almost 14% during the past two quarters sequentially. If this trend continues, it will drive both higher service and direct-sales revenue.
- Used-car prices remain slightly depressed, as well, down more than 1%. But like scrap prices, used car ASPs increased sequentially.
- General and administrative expenses increased $1.9 million, but fell as a percentage of sales, to 10.3% versus 10.8% last year, and 10.9% sequentially.
- Operating income and net income both increased at a higher rate than revenue, as total expenses as a percent of sales declined sequentially, and from last year.
- Earnings per share increased sharply due to share buybacks in addition to improved overall profitability.
- The company has bought back 17.5 million shares during the past 12 months, and repurchased 2.9 million in the third quarter.
- Debt continues to be part of Copart's buyback and growth-investment strategy.
- Copart spent $66.1 million in capex in the quarter, 18% more than the $55 million it spent in the prior quarter, while its total debt and cash on the balance sheet was relatively the same as the company reported after the second quarter.
- The company refinanced $300 million in debt for five years in the quarter, and increased its revolving credit by $50 million, both at better terms with lower interest rates than prior credit agreements.
What management said
Executive Vice President of U.S. Operations and Shared Services William Franklin talked about a shifting trend in the U.S. that's driving top-line growth.
[W]e believe we are seeing a growth in overall size of the North America salvage market. Accident frequency was up, driven by lower fuel prices and higher employment trends, which is leading to increases to miles driven and average speed of travel, and consequently to more frequent and more severe accidents. And we believe this trend will continue. At the same time, we are also seeing growth in salvage frequency. ... The first is the growth in repair costs, driven by industry consolidation as more independent repair shops are being purchased by MSOs... The second is the increase in average age of the car parked which reached 11.5 years in 2015 and is expected to grow.
Next, Franklin discusses how the company is turning that growth into even bigger profits by maintaining discipline on operating expenses:
While we grew consolidated revenue by 16.9%, we grew our gross margin by 23.7% and our operating margin by 28.7%, once again demonstrating the operational leverage endemic in our business model... We also remain focused on controlling our G&A expenses. While G&A of $31.7 million for the quarter was up both year over year and sequentially, we remain well below the run rate of fiscal 2014 of $36.8 million for the quarter.
In the second quarter, Copart announced plans to open another 15 yards during the next 12 months, and made significant progress on that front. It acquired five yards, and placed two of those in service during the third quarter.
Based on the recent trends of more people driving more miles, and the average age of cars on the road, management is clearly betting that the extra capacity will pay off in continued growth going forward. The company is also in a position to fund much of that growth with cash flows, as the $65 million capex spend in the quarter showed.
When it comes to shareholder return growth, share repurchases look to remain a big driver. The company has repurchased some 14% of shares outstanding during the past 12 months, and still has 44.5 million shares available for repurchase under the current board-approved repurchase program. That's more than 40% of the company's entire shares, so it's likely that we'll see a continuation of this aggressive buyback program in the future.