How IAA Competes with Copart

Copart (CPRT 1.14%) may be the 300-pound gorilla in the auction market for totaled cars, but IAA (IAA) is a fierce competitor and is now publicly traded after being spun out of KAR Auction Services (KAR -0.34%). IAA is relatively underrated compared to Copart. Could IAA be a better investment?

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

Nick Sciple: I want to talk briefly, in addition about some of these other companies in the industry, Copart isn't the only operator in this car auction subsector. What are some other companies that we should be paying attention to, and how do they compare to what Copart is doing?

Luis Sanchez: For sure. So Copart is like a 300-pound gorilla. They have 50 plus percent market share in this industry, which is great. That's one of the reasons why it's been such a fantastic business. It's really been a duopoly though. There's this other company called IAA, which is a little bit smaller. They have somewhere between 30 or 40 percent market share, so it's actually still very sizable. It's really just been a duopoly between Copart and IAA. IAA, two-years ago, spun off of KAR, which is KAR Auction Services, which is another car auction company that we could talk about in a minute. But basically, IAA is like a mini Copart. The way that I would frame the difference between IAA and Copart other than just sheer scale, is that Copart has been more on the leading edge of technology. Copart, heading into this pandemic, one thing that has really helped Copart is they were already fully online with virtual bidding and virtual auctions, whereas IAA wasn't fully online at the start of the pandemic, so they probably lost a little bit of market share this past year. But now, going through the pandemic, they certainly got to 100 percent online. The other thing that's interesting about IAA and Copart is Copart is also an international business. Copart has really been growing in international locations; IAA, it's primarily in North America, although if you look at their recent earnings, calls, and management statements, IAA is basically looking at Copart, and they're following the Copart playbook. So now, IAA, they're aggressively going into international markets, they're aggressively investing in technology, and they're aggressively putting into place the best practices that Copart has operated with and just trying to close the gap. I think that's actually a really interesting story. If you like this industry, and maybe you think Copart is too expensive, maybe take a look at IAA, and that's more of a discounted way to play the theme.

Nick Sciple: So would you say that IAA is like the Lowe's to Copart's Home Depot, or the Pepsi to Copart's Coke in this situation?

Luis Sanchez: Yeah. It's the number two, it's the underdog. It also operates at half of the profit margin as Copart. There's a potential investment story there, if you think that IAA can execute on this plan to raise their margin and grow internationally. Potentially, IAA can push through a lot of, actually, a higher rate of earnings growth than Copart. It also trades at a very slight discount to Copart. So that's why I think that IAA is very analogous to Copart and it's potentially an interesting investment if you like Copart.

Nick Sciple: Absolutely. So the question is, is there enough of an execution difference between the businesses to justify that difference in valuation? Because if IAA can execute, the room to improve gives them a lot more upside relative to Copart, which was already executing well.

Luis Sanchez: Great. I think what a lot of people would say is, Copart's already generating a good amount of earnings growth and it's not too crazy. The valuation isn't too crazy and Copart's definitely rich, so going with Copart is like going with the best-of-breed, lower execution risk, kind of way to play the sector, where IAA is like the higher-risk but probably higher reward if they do a good job.Nick Sciple: Absolutely, yeah. Lowe's Home Depot just keeps ringing in my head as you make that comparison there.