Auto salvage and auction company Copart (NASDAQ:CPRT) announced second-quarter financial results on Feb. 23, bouncing back from a relatively flat first quarter. The company reported 8.5% sales growth, 13% profit growth, and a 20% jump in earnings per share.
Here's a closer look at the results, as well as three key takeaways from the quarter.
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Takeaway 1. Driving strong unit sales even as a strong dollar and low scrap values affect revenue
The strong U.S. dollar has had a two-sided impact on Copart's business over the past year or so. To start, Copart has invested in growing its business outside the U.S., acquiring and opening salvage operations overseas, and the revenues those facilities produce (almost always in the local currency) translates to fewer dollars. The company said foreign exchange had a negative-$3.5 million impact in the quarter.
The second part is that 20% of its North American auction buyers have historically been international bidders. On the earnings call, CFO Jeffrey Liaw pointed out that the U.S. dollar is at or near a 10-year high against important currencies such as the euro and Mexican peso. He also said that international buyers generally purchase higher-value cars. Of course, international buyers have purchased fewer cars in this environment.
But things could be turning around. Even though the dollar remains strong, Will Franklin, executive VP of U.S. operations, said foreign participation was up in the second quarter, sequentially.
Scrap values are also affecting revenue, driving down average selling prices, or ASPs. Liaw said that January auto body scrap values were at five-year lows and down 68% from the post-recession peak in September 2011. Scrap prices play a role in the ASP for the majority of units, since the company's business is largely work it does for insurance companies, selling off totaled cars to recyclers and parts dealers.
The impact of falling scrap prices can be seen in the spread between unit growth (12.9% worldwide) and revenue growth (8.5%). However, management said that internal data indicates ASPs are stabilizing.
Takeaway 2. Using share buybacks to improve per-share value, but at a cost
Over the past year or so, Copart management has repurchased 14.8 million shares, more than 11% of shares outstanding. Doing so improves per-share returns (as evidenced by the spread between net income and earnings-per-share growth in the quarter), but at a cost.
The recent Dutch auction was completed in December, and the company repurchased 8.3 million shares at $39 per share, while the company bought around 6 million shares in July 2015, when the stock was trading at about a 10% discount to the current price.
The key? Debt has been the primary source of funding for share buybacks. Yes, the company has used cash on the balance sheet to buy the shares, but the source of that cash is debt. About one year ago, Copart refinanced its existing debt and at the same time increased that debt by about $400 million, while adding $300 million to the balance sheet.
The terms of that debt were better and cheaper than its prior obligations, but the answer to whether this use of debt was the right move will only be answered over time.
Takeaway 3. Continuing to focus on cost-containment and opportunistic expansion
On the earnings call, Franklin said the company expects to open 15 new yards in the next 12 months and is actively working to expand another 18 existing facilities in North America, and that it will spend approximately $100 million in capital expenditures over that period. This growth outlook is largely the product of expanded and new contracts with insurance customers in North America.
At the same time, the company continues to keep operating costs in check. Copart spent $32.5 million on general and administrative expenses in the quarter, down $2.5 million from one year ago. The company's average G&A spend over the past five quarters is down significantly from the five quarters before that, even though the company's revenue and geographic footprint has grown over that time.
Technology has been a key driver, allowing the company to increase its scale and scope, without having to increase administrative staff or other operating costs to support this growth.
Copart operates in a business where it probably must continue to focus on costs and opportunistic expansion. The average car on U.S. roads continues to get older, but this trend is as much about automakers that are building better cars than about anything else, so it doesn't necessarily indicate a huge future opportunity. But at the same time, falling gas prices have led to more miles driven, which leads to more accidents. And it's those accidents that produce the majority of the cars Copart sells.
So while it's not a typical growth industry, Copart can expand by taking market share and can use cost-controls and share buybacks to further improve per-share value and returns. At least that's the game plan management has laid out and continues to execute on.