Does Copart Have a Moat Around Its Business?

Copart (CPRT -1.52%) operates an auction business for buying and selling totaled cars. Although this is not an exciting business, it is a very defensible one with significant barriers to entry. Long-term investors may want to consider Copart as it benefits from the continued growth in miles driven and incidents of total loss resulting from car crashes.

In this video from Motley Fool Live, recorded on March 11, Motley Fool contributor Luis Sanchez and Industry Focus host Nick Sciple discuss Copart and the market for used cars.

Nick Sciple: One other thing I wanted to talk about, Luis, this may be interesting, is just the barriers to entry in this market. You'd mentioned and having lots all over the country to be able to take this inventory, connecting all these different buyers and sellers. How do you think about the moat that Copart has in the market in which they operate?

Luis Sanchez: There's a few sources of a potential moat here. I use that word marketplace up top. There's a lot of terms that get thrown around, like online marketplaces and flywheels, and this is like an old school marketplace. They benefit from liquidity. There's a network effect. Buyers pay attention to this auction and they want to come in bid at this auction because they know that there's going to be a good source of cars, and the insurance companies want to take their cars to this auction because they know that there's going to be a lot of bidders and they're going to get the best price. The other thing too is that there's geographic monopoly, so just where these lots are located, they're very strategically located outside of metropolitan areas, where there's a lot of car traffic, where there's urban density, and frankly, these lots are huge. So just having the space to hold literally thousands of cars is not nothing. It costs money to set up that lot. I think probably the bigger barrier, really, is any marketplace or auction, it's really tough to get started if you don't already have buyers and sellers. It'd be really, really, really hard for us to set up a Copart competitor tomorrow because who's going to bring us the cars, and how can we assure to them that there's going to be enough buyers to sell their cars at competitive prices?

Sciple: Absolutely. It's one of those things where once you set up in a geography and up and running and then have these relationships, just really hard to see why do I need another lot across town? Why do I need two different logistics infrastructures, to think about bringing different things if I'm the insurance company, or anything like that? It's one of these businesses where the physical infrastructure really helps them out. It reminds me of, it's a different business, but Vulcan Materials, they own aggregate, they have locations all over the country, the same type of thing, because of the cost of shipping their stuff, they only need so many in certain locations.