Copart (NASDAQ:CPRT) released its second-quarter financial results on the evening of Feb. 24, falling well short of analyst estimates on revenue, and just shy of earnings per share (by one penny). The highlights:
- Total revenue was $276 million, a $10 million drop versus the year-ago period.
- Earnings per share and net income both climbed from last year.
- Operating expenses declined 9% in the quarter and are down 7% through the first half of fiscal 2015.
Let's take a closer look at the details of the release. The revenue shortfall needs explaining, but management's efforts to get costs in line is starting to really pay off. Let's dig in.
Sales decline isn't a great sign, but ...
Until management gives us more detail, it's hard to really know what the driver there is, and whether it's a short-term speed bump or a longer-range concern. According to the release, service revenue increased slightly to $238 million, while vehicle sales declined $13 million to $37.75 million in the quarter. While the company makes the majority of its money selling cars for insurance companies and other third parties, its direct sales business is still important. It will be interesting to hear what management has to say on the earnings call.
Operational improvements having a positive impact
Over the past several earnings calls, CEO Jay Adair has commented on the efforts that management has made to reduce operational expense. A big part of these efforts were tied to the QCSA Direct acquisition last year that left the company with a number of redundant locations, and it took the company some time to rationalize its new combined footprint. A number of QCSA Direct locations were closed or relocated in the process.
Additionally, the company's move to Texas last year has helped reduce some overhead expense. So far in 2015, it's paying off.
General and administrative expense in the quarter came in at $27.6 million, versus $31.2 million last year, good for almost a 12% reduction. Yard operations decreased $1 million in the quarter, after rising in the first quarter. However, this cost can fluctuate more based on sales activity, and as a percentage of service revenues, they have declined to 49.8% in the first six months of the year, from 51.1% in the same period last year.
What's the company planning for all that new cash?
In December, Copart took out a significant amount of new debt, via $400 million in secured notes and a $300 million term loan. The company used part of the proceeds to refinance prior debt but ended the quarter with about $400 million more debt than it had a few months ago. The upshot is that the company also has significantly more cash on hand now than before -- almost $430 million more -- with a total of $590 million in cash and equivalents.
Furthermore, the company now has a $300 million line of credit, which it has not drawn on as of the end of the quarter.
The rates look reasonable (after you wade through all the ways the rate is reached) but quite variable. If interest rates remain low for the next few years, and -- here's the big caveat -- if management uses the proceeds effectively to grow and improve the business, this could be a great time to use relatively cheap debt.
It's also worth noting that a Bank of America/Merrill Lynch analyst upgraded his rating on Copart stock on earnings day as well, moving the stock to "buy" with a price target of $45. Kiss of death? Let's hope not.
OK, in all seriousness, the only real yellow flag in the release was the sales miss, and what that means will depend on what management has to say to explain what happened. The new debt could be good, or it could be trouble, frankly, depending on what management does. However, I think that as long as founder Willis Johnson is still involved -- and he is, on the board of directors -- and still a major shareholder, we can trust management to use the cash wisely. However, only time will tell, and it really is a matter of trust.
On the positive side, the company continues to run more efficiently and cost-effectively. Assuming there's not a long-term problem with sales, Copart's operational excellence should lead to more profit growth going forward. But we need management to explain that sales miss ...