If you're a diehard car-lover, this Take might be painful for you. If you're an insurance agent or own a lot of stock in auto insurers like Chubb
This auto-salvage specialist continues to build a profitable business from the accidents of others. Sales were up about 12% for the period, and net income climbed 24%. Copart saw operating income rise 18%, while operating margin climbed significantly to 36.6%.
Same-store sales climbed about 10% for the quarter, and the company saw not only strong vehicle volumes, but also record financial returns on a per-car basis.
Vehicle salvage probably seems extremely low-tech. Junking cars used to be the purview of grease-smeared guys who often were missing teeth, fingers, or toes. But Copart is thriving precisely because it's incorporating technology into the process.
With its VB2 Internet technology, the company has converted all of its operations from live auctions to Internet-based ones. Much like what eBay
That said, Copart is not unique in this respect. Competitors like Insurance Auto Auctions (recently taken private) have launched their own Internet-bidding platform. What will still help Copart, though, is its strong reputation, good relationships with suppliers and buyers, and a nationwide network of 133 facilities. Given that competition has always been present in the auto-salvage market, and Copart has done pretty darned well to date, I wouldn't worry too much about competitive threats just yet.
Valuation is where this story gets stickier. While the company has grown income at a compounded rate of about 28% a year, analysts currently project only about 12.5% growth for the five years to come. Given that nine-month earnings to date are up by more than 30% from the year-ago level, that seems like a pretty steep drop.
If you believe the analysts, then Copart is too expensive to buy today. If you think the analysts have it wrong, though, valuation may not seem so bad for a company with such high margins, a clean balance sheet, and strong returns on both equity and assets. With no dividend and a somewhat lofty enterprise value-to-free cash flow ratio, growth is really the key here, and it's also the difference between a shiny new stock idea and a possible car wreck.
For more on the industry, we've salvaged the following takes:
- Metal Management's Unmanageable Market
- A True Scrapper
- Copart's Smashing Quarter
- There's Gold in Scrap Metal
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).