How Copart Makes Money From Car Crashes

Ever wonder what happens to your car after it is totaled? You may be surprised to learn that there is an entire economic ecosystem built around what happens to cars after a crash. Copart (CPRT -0.68%) plays a significant role in that ecosystem and has found a way to make money from car crashes.

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

Nick Sciple: Absolutely. I want to go into the companies in that ecosystem that we wanted to talk about today. One of the main ones is Copart. When the insurance company decides they want to auction off your car, Copart assist them with that. Their ticker is CPRT. Well, where does Copart fit into this process? After you total your car, you've decided it costs more to fix that it's worth, what happens to your car after that and where just Copart come into that process?

Luis Sanchez: Copart is a industrial marketplace, essentially. Their clients are essentially the guys who are trying to get rid of their cars, so really, insurance companies. There's a few other potential sellers of cars, but insurance companies are the vast majority that take possession of the totaled cars. Essentially, totaled cars get transported to these massive lots that are located outside of major urban areas, and they basically just run an auction, it's done online, it's done in person, and there's all sorts of people who are trying to buy these broken cars. I guess the other question is who are the buyers and why might they be interested in the car? It's really all sorts of participants. There's a large participation of foreign buyers, it's roughly one-fourth of the people who are buying totaled cars. There's an interesting reason for that, because the definition of a totaled car, it could actually be different in the U.S. versus another country. It might actually be more economical for a buyer in another country to buy a broken or totaled car in the U.S., and there might be a lower cost to repair it in that other country, or it might just be harder to buy that brand of car in that other country. There's also what are called dismantlers, who will actually buy the car, sell all the auto parts that still retain value, and then just scrap the car. There could also just be some scrappy repair shops who just know that they could fix the car and sell it for a profit.

Sciple: So fundamentally, what Copart is doing is connecting these sellers who have cars they don't want, or insurance companies, with all these different disparate buyers out there in the market who have some interest in these products for whatever reason. Whether it's because you're going to arbitrage repair costs in different countries, or you're searching for some vintage car that only comes up for sale because you get one totaled off the back of a truck, or something like that. Copart really helps connect those buyers and sellers in that market. Where does Copart extract value for themselves from that operation?

Sanchez: The primary way they make money is by taking a commission from the auction. It's roughly a 10% commission that they take, and that's based on whatever the car goes for. The really interesting thing about that is, as we mentioned up top, the value of used cars has gone up a lot, and that's actually been a benefit to Copart because they benefit from a higher auction price. So their interests are aligned with their customers, I guess you could say. That's the primary way they make money. There's also some ancillary things. They sell access to the data to potential buyers, they sell technology that could be used to bid at the auctions. An example of that could be like if you're a foreign buyer and you want to use more advanced techniques to bid for cars, say you want to have a price monitor, almost like an algorithmic trading bot, they might charge a little bit extra for that. They also do inspection or handling the title, transfer the car. Another thing that's interesting is they have a service that will automatically pay back the car loan once the proceeds have cleared from the sale of the car. They'll help the insurance company automate the process of closing out the car loan and transferring the title. So there are some little ancillary services here and there that they can make some extra money from, but the vast majority of their financials, really, are driven by the proceeds of the sales.

Sciple: Absolutely. So it's the more cars that are getting sold off and the higher value of those cars, then the better it is for Copart. I guess part of the driver of that is the rate at which vehicles are being totaled, and that has been somewhat of a tailwind for the business. If you look back over the past 10 years or so, the rate at which cars are being totaled or taking a full loss, that's been a benefit to them. In addition to there could be some fluctuations in used car prices.