Copart, Inc (NASDAQ:CPRT) may have missed analyst estimates for earnings in both the fourth quarter and for the year, but the expert in auto auctions still made a lot of solid progress with its business, including the integration of a key domestic acquisition, the finalization of relocating its headquarters and key staff to Texas, and expansion in Europe and the Middle East.
Not a total loss; just some integration pains
Analysts consensus estimates for Copart's fourth quarter and full-year earnings per share were $0.41 and $1.54, respectively, while Copart reported $0.39 and $1.36, respectively. Though the fourth quarter results represented an increase of almost 22% compared to the year-ago period, Copart's net income for the full year actually declined. However, a little perspective goes a long way.
Copart's fiscal year 2014 acquisition of QCSA Direct expanded the company's reach, as well as its ability to participate in non-insurance markets, like the donated car auction business through Desert View Auto Auctions, which will remain a stand-alone brand.
Due to a number of contractual obligations with some QCSA customers, Copart wasn't able to completely integrate the Quad Cities locations into Copart until the fourth quarter. The result was that basically zero operational efficiencies from the acquisition will occur until 2015. CEO Jay Adair from the second quarter earnings call:
[QCSA] may have had a facility that was 80 miles away and Copart's 20 miles away. So the cost that we're ripping out of the system are all wasted duplicate costs like that, paying rent on a facility when we already have a facility, towing a car too far.
In short, those inefficiencies have just now been worked out of the newly combined companies. Furthermore, a failed software rollout had a major impact on the full-year results. More on that later.
Copart's international expansion accelerated in 2014, with the company making acquisitions in Brazil, Germany, Spain, and the United Arab Emirates. While these operations -- according to management on the earnings call -- are still not all profitable, the cost structures are essentially in place, and simple revenue growth in those markets will lead to profitability.
International growth will be a key focus in coming years. On the call, Adair pointed out that Copart and its largest competitor (LKQ, a salvage operator) already have the majority of the domestic market -- which is rather mature -- and he doesn't see any significant acquisition targets out there. Internationally, however, most markets are dominated by small, regional players that don't have Copart's advantages of scale and technology.
Time to trim the fat
Adair also stated that the focus for 2015 will be on cost and efficiencies. While they would not specify a number or a target for reduction, the management team realizes that it's time -- with the QCSA integration behind them, the groundwork for international expansion laid, and all of the company's corporate resources now located in Texas -- to focus on ways to work on operating costs in the field, and to reduce general and administrative costs at headquarters.
Adair summed it up on the earnings call:
We clearly know there are some areas we can cut costs. If you look at the last three years, there was the move out of California, there was the technology approach; a number of these things added one-time costs to the company ... The point is this: 2015 will be the last year where we see any kind of non-recurring expenses both in the field, and G&A.
Getting $29 million back?
Copart took a $29.1 million impairment expense in 2014, tied to a failed integration of an SAP ERP system. The company is pursuing litigation against Sparta Consulting -- now called KPIT -- the consulting company that was contracted to implement the system. How significant is that $29.1 million? If the company can recoup those losses, it would be worth about $0.15 per share in earnings.
If the ERP system had performed as expected (and the vendor installing it performed as expected) Copart would have been able to use depreciation and amortization rules to carry the cost of the system over the life of the system versus this substantial one-time charge to 2014. While there is no guarantee the Copart will win its case -- or even that it will get all $29 million back if it does win -- this is something that's worth keeping an eye on.
Earnings may have declined, but much progress has been made
It's not great that Copart's earnings went backwards in 2014, but this management team has a long track record of success. The good news is, a lot of groundwork has already been laid, with international expansion, the QCSA integration complete, and the wrapping up of relocating headquarters staff. All that management needs to do is fine-tune things, and profits should bounce back in 2015.
Jason Hall has no position in any stocks mentioned. The Motley Fool recommends Copart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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