Copart, Inc. Copart, Inc. (NASDAQ: CPRT)(NASDAQ: CPRT)An In-Depth AnalysisAn In-Depth Analysis

Presented by:

Jordan Fisher

2/25/02

ProcessProcess

I originally found out about Copart through a stock screener. I was looking for smaller companies (Market Cap. Under $1B) with a bias towards value companies. At first glance Copart seemed like a great company with tremendous upside. I did a DCF and was about half way through the work up when their 2002 Annual Report came out. After entering in actual numbers instead of estimated numbers for 2002, I realized that the company was at roughly fair value. During the next few months I watched Copart slowly decrease from around $12 to its current price of roughly $8. I now think the company is undervalued and think it is a good company and good investment. Guidance for growth has been lowered and their Q2 conference call provided me with detailed information for the DCF. Therefore, after watching the stock trade for a few months, I am now ready to present it.

Executive SummaryExecutive Summary

Copart is a growing company and currently the leader in salvage car auctions and related services. While once a “super growth” company, things have slowed down and investors have shown their disappointment. However, Copart is a well managed growing company that has become a leader in their industry. While capital expenditures have reached very high numbers in recent years, Copart would like to focus on utilizing their already large capacity before planning further expansion. The infrastructure is in place for Copart to increase earnings without new growth of salvage vehicle locations. Once Copart utilizes capacity they will once again analyze further growth opportunities. With lowered guidance and a slow down in growth, Copart has seen a large sell off in shares of their stock. Judging by Copart’s financial ratios and discounted cash flow analysis, I feel Copart is an undervalued company. I have been interested in Copart for about 5 months and feel that right now could be a good buying opportunity.

Executive Summary Cont…Executive Summary Cont… I am recommending Copart as an addition (“buy”) to the RCMP portfolio The company is not significantly impacted by positive or negative economic

conditions Copart has a strong business model and has gained competitive advantages

through innovation in internet technology and customer service The company is a national leader in the salvage vehicle industry and has the

infrastructure in place to cover the entire nation with salvage vehicle services Copart has excess capacity, which they will utilize in coming years so they will be

able to grow earnings with a decrease in capital expenditures Management has led the company to be an industry leader and is continuing to

grow revenues through expansion and innovation With the stock near a 52 week low, a P/E of 12 and PEG ratio of .87, and calculated

fair value of roughly $9.80, Copart could be a good value play Copart does face significant competition, but is THE leading company in the

salvage vehicle business While Copart has seen a few downgrades, placing it at a hold, they are still a

growing company with strong fundamentals. The premium on “super growth” is no longer priced into the stock

Macroeconomic OverviewMacroeconomic Overview

With consumer confidence at a a 9 year low, war concerns with Iraq and North Korea, and weak economic data, there is a tremendous amount of uncertainty in the stock market. Since the stock market does not like uncertainty, and given little evidence for a strong economic recovery any time soon, I felt a company that derived revenues from non-economic based functions was appropriate for the client’s portfolio. Since Copart has a beta of roughly 1.16 the stock will still be affected the movement of the overall market. However, in a struggling economy, Copart still has the opportunity to grow revenues and expand.

Personal bias of the stock market would subscribe to the trading range theory. This bias comes from such problems as overcapacity, little effect of lowered interest rates (and not much more room to go), investor worries, and state debt problems. Furthermore, analysts feel that effects of disasters such as Enron and WorldCom have not been totally realized by the economy. Lastly, the S&P 500 is still trading at a P/E of roughly 27, which is by no means cheap. Therefore, I predict the stock market remaining in a rut for a while without a long bull or bear market. Instead the market could see a few short bull and bear markets. Obviously, there is no way to know what the stock market will do, I base my opinion on current market valuations and economic indicators.

Business DescriptionBusiness Description

Founded in 1982, Copart, Inc. is a leading provider of vehicle auction services in the United States. The vehicles are typically purchased by licensed dismantlers, body shops, rebuilders and used vehicle dealers. Salvage vehicles are either damaged vehicles deemed a total loss for insurance or business purposes or are recovered stolen for which an insurance settlement has already been made. (from 2002 Annual Report)

Copart generates revenues primarily from auction fees paid by vehicle suppliers and buyers as well as related fees for services such as towing and storage

Today, Copart has over 100 auction facilities in 40 states. In fiscal 2002, the vehicles sold by Copart generated more then $1.2B in gross auction proceeds.

Business Description Cont…Business Description Cont…

Businesses:

MAG (Motor Auction Group), a public auction subsidiary introduced in April 2001. MAG specializes in the auction of older used vehicles to the public and dealers. Copart wants to consolidate the public auction business, and since 2001 they have acquired four new MAG facilities. Cars are received from repossessions, fleets, charity donations, dealer trade-ins, and cars and trucks offered for sale by the general public.

Introduced in May 2002, Copart Offsite Sales is an internet program that allows vehicle suppliers to auction any vehicle, boat, or heavy equipment from where it sits. This program is offered to Copart’s 37,000 buyers and available by membership through www.copart.com

Business Description Cont…Business Description Cont…

In February 2002, Copart announced the addition of virtual bidding to their internet feature for buyers. This enables customers to bid on vehicles in real-time over the internet. The online bidding service enables registered buyers anywhere in the world to participate in Copart auctions.

-Sellers have greater exposure for vehicles they wish to auction and customers can run very specific searches to find the exact vehicle

they are looking for.

-Technology in the website allows virtual bidding, and detailed searches

-31% of gross proceeds from vehicles sold or auctioned were through Internet bidders

Salvage ProcessSalvage ProcessCopart generates revenues primarily from auction fees paid by vehicle suppliers and buyers as

well as related fees for services such as towing and storage

The Process for vehicles:1. Assignment- Vehicle sellers initiate the process through Copart’s Auction System (CAS)

by telephone, fax, electronic data Interchange (EDI) or by accessing the website2. Dispatch- Copart then picks up the vehicle (3,000-5,000 daily) from body shops, tow

yards all over the country. Copart automatically locates its closest auction facility once the vehicle is assigned

3. Inventory- Copart takes five digital pictures of each vehicle that arrives, does a physical inspection, scans receipts etc. from body shops, then stores the vehicle until auction

4. Title- Once the insurance company and the insured agree on values the title is free to be discharged and Copart takes title. Bidding now can begin

5. Auction- Auctions usually last less then one minute. It starts with proxy bidding then a live auction is held with three kinds of bidders (live crowd, virtual on-line, proxy bidders)

6. Settlement- The vehicle buyer settles first giving Copart the sales price plus buyer fees and transportation charges. Then Copart pays the Insurance company the sales price of the vehicle less fees and advance charges incurred during dispatch and transport. This is usually done through electronic funds transfer, simplifying processing and accounting

FacilitiesFacilities

Copart has 101 facilities in 40 states

2,800 acres of vehicle storage space

Roughly 30% market share

Does business in 44 countries

ManagementManagement

The following was taken from an AG Edwards research report dated October 22, 2002

Quality Management

“Willis Johnson founded CPRT and is the current CEO. Based on our conversations we have had with various industry participants, he is viewed as having an impeccable reputation as a visionary and manager. The company’s president, Jay Adair, was responsible for, among other things, being the architect and designer of Copart’s Internet bidding process which proved to be not only a significant competitive advantage to Copart but a significantly profitable event as well.”

Operating and Growth StrategyOperating and Growth Strategy

Copart’s growth strategy is to increase revenues and profitability by:

1. Acquiring and developing new salvage vehicle auction facilities in key markets

2. Pursuing national and regional vehicle supply agreements

3. Expanding service offerings

4. Developing and expanding public auction facilities

Competitive AdvantagesCompetitive AdvantagesA. National Coverage and ability to respond on a national scale

1. Reduces administration time and effort2. Reduces overall vehicle towing costs3. Convenient local facilities4. Improved access to buyers throughout country5. Prompt response in event of natural disaster or other catastrophe

B. Value Added Services1. Vehicle pick up in 24 hours2. Live Internet bidding3. Email notifications to potential buyers of salvage vehicles that match desired characteristics4. Sophisticated vehicle processing5. CoPartfinder6. Offsite Sales

C. Ability to successfully acquire and integrate new facilities

D. Technology to enhance and expand businessinternet technology, proprietary software etc.

Porter’s Five ForcesPorter’s Five ForcesEntry of New Competitors

Low- Copart is acquiring other facilities at an intense pace and the largest salvage auction facility. Entry would be difficult and costly and competition would be against a 20 year veteran

Threat of SubstitutesHigh- Copart has significant competition discussed earlier. In addition buyers can bypass them and buy directly from insurance companies

Bargaining Power of BuyersLow- buyers compete with each other in auction style bidding and copart makes money through volume not price competition

Bargaining Power of SellersHigh- Copart competes with other salvage auctions and does business with a limited number of suppliers. Two companies account for 14% and 9% of revenues respectively

Rivalry among existing competitorsHigh- However, Copart is expanding and picking up market share and can respond nationally very quickly. Their large network of auction sites gives them an advantage.

Copart’s ProfileCopart’s Profile

Price and Volume

52-Week Lowon 19-Feb-2003

$7.04 

Recent Price $8.00 

52-Week Highon 25-Feb-2002

$21.45 

Beta 1.16 

Daily Volume (3-month avg) 679.9KDaily Volume (10-day avg) 1.84M

                           

52-Week Change -61.6%

52-Week Changerelative to S&P500

-50.6%

Share-Related Items

Market Capitalization $738.7M

Shares Outstanding 92.3M

Float 72.7M

Dividends & Splits

Annual Dividend none 

Last Split: factor 1.5 on 22-Jan-2002

Per-Share DataBook Value (mrq*) $5.43 

Earnings (ttm) $0.65 

Earnings (mrq) $0.15 

Sales (ttm) $3.65 

Cash (mrq*) $1.36 

Valuation RatiosPrice/Book (mrq*) 1.47 

Price/Earnings (ttm) 12.27 Price/Sales (ttm) 2.19 

Income StatementsSales (ttm) $339.1M

EBITDA (ttm*) $111.6M

Income available to common (ttm) $60.6M

Profitability

Profit Margin (ttm) 17.9%

Operating Margin (ttm) 28.4%

Fiscal Year

Fiscal Year Ends July 31

Most recent quarter(fully updated)

31-Oct-2002

Most recent quarter(flash earnings)

31-Jan-2003

Management EffectivenessReturn on Assets (ttm) 11.61%

Return on Equity (ttm) 12.94%

Financial Strength

Current Ratio (mrq*) 4.20 

Debt/Equity (mrq*) 0.00 Total Cash (mrq*) $125.7M

Short InterestAs of 8-Jan-2003

Shares Short 2.26M

Percent of Float 3.1%

Shares Short(Prior Month)

2.34M

Short Ratio 5.36 

Daily Volume 421.0K

Peg = .87

Industry ComparisonIndustry Comparison

*data taken from zacks.com as of 12/02/02

COPART INC   INDUSTRY AVG  S&P 500 

Pr Chg YTD  -20%  -5% 

P/E  (12Mo)  14.6  8.0  19.0 

Price/Book  1.7  0.7  4.2 

Price/Sales  2.7 

Price/CF  11.7  5.4 

Impl Ret/  P/E  1.21  2.17 

Div Yield  0.0%  0.0%  2.0% 

Net Margin  18.1%  2.0% 

ROE  13%  11%  15% 

   

CompetitionCompetition

Principal competition are other vehicle auction companies and vehicle dismantlers. The largest national or regional vehicle auctioneers include

Auctioneers- direct competition

• ADESA Corporation (5% market share)• Auction Broadcasting Company• Insurance Auto Auctions, Inc. (20% market share) • Manheim Auctions• SADISCO

Dismantlers- They buy salvage vehicles directly from insurance companies and bypass auction companies entirely

• Greenleaf• LKQ Corporation

Factors That May Affect Future ResultsFactors That May Affect Future Results

1. Copart depends on a limited number of suppliers. The lose of one or more major suppliers could adversely affect financial performance.

2. Mild weather conditions can negatively affect revenues

3. The salvage vehicle auction industry is highly competitive and Copart faces significant competition.

4. Rate of growth may decline with a decrease in acquisitions and the opening of new salvage auction facilities.

5. As growth continues it may become more difficult to manage the larger company

6. Limited experience in the public automobile auction business

7. Government regulation of of the salvage vehicle auction industry may impair our operations, increase costs and create potential liability

8. Operation of salvage facilities could pose environment risks

Stock Chart (Since IPO)Stock Chart (Since IPO)

Stock Chart (6 Month)Stock Chart (6 Month)

Copart has seen a decrease in growth numbers and has been adversely affected by the economy. However, their current price represents a strong buying opportunity.

Recent NewsRecent NewsSept. 17, 2002:

Copart achieves record profitability for fourth quarter and fiscal 2002; revenues increase 20%, net income grows 20%

Sept. 25, 2002:

Copart enters into exclusive nationwide agreement with insurer SAFECO. Under the terms of the contract, Copart will be the exclusive vendor in the US for SAFECO

Oct. 22, 2002:

Copart opens facility in Springfield, Missouri

Nov. 19, 2002:

Copart opens a new facility in Corpus Christie, Texas

Nov. 20, 2002:

Copart announces first quarter results, revenues up 16% and net income up 15%

Recent News Cont…Recent News Cont…

January 29, 2003:

Copart opens fifth location in Southern California

February 18, 2003:

Copart Reports second quarter results. Revenues up 16%, Operating Income up 15%

February 20, 2003:

Copart receives board approval to repurchase up to 9 Million shares without any time limit. Shares can be purchased in the open market or through private transactions.

Decomposition of ROEDecomposition of ROE1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

ROE(Net Income/Equity) 11.94% 13.38% 15.86% 11.80% 10.23% 10.21% 10.06% 9.89% 9.44% 8.76%

#1 (Tax Burden ratio)Net Profits over 21,966 29,430 42,686 57,390 56,068 63,185 69,581 74,795 78,361 81,924Pretax Profits 35,122 47,975 71,044 93,658 90,432 101,911 112,227 120,637 126,389 132,136

62.54% 61.34% 60.08% 61.28% 62.00% 62.00% 62.00% 62.00% 62.00% 62.00%#2 (Interest Burden ratio)Pretax Profits over 35,122 47,975 71,044 93,658 90,432 101,911 112,227 120,637 126,389 132,136EBIT 33,387 46,217 68,118 89,940 88,023 99,502 109,818 118,228 123,980 129,727

1.05 1.04 1.04 1.04 1.03 1.02 1.02 1.02 1.02 1.02#3 (Return on Sales)EBIT over 33,387 46,217 68,118 89,940 88,023 99,502 109,818 118,228 123,980 129,727Sales $141,751 $190,042 $253,889 $316,456 $367,089 $418,481 $468,699 $515,569 $556,815 $601,360

23.55% 24.32% 26.83% 28.42% 23.98% 23.78% 23.43% 22.93% 22.27% 21.57%#4 (Asset turnover)Sales over $141,751 $190,042 $253,889 $316,456 $367,089 $418,481 $468,699 $515,569 $556,815 $601,360Assets 218,677 262,325 316,635 535,847 667,010 629,954 763,185 719,527 847,026 798,717

0.65 0.72 0.80 0.59 0.55 0.66 0.61 0.72 0.66 0.75#5 (Leverage ratio)Assets over 218,677 262,325 316,635 535,847 667,010 629,954 763,185 719,527 847,026 798,717Equity 183,983 219,892 269,153 486,217 548,191 619,011 691,940 755,955 829,985 935,073

1.19 1.19 1.18 1.10 1.22 1.02 1.10 0.95 1.02 0.85

#3 times #4 = ROA 15.27% 17.62% 21.51% 16.78% 13.20% 15.80% 14.39% 16.43% 14.64% 16.24%

#6 (compound leverage) 1.25 1.24 1.23 1.15 1.25 1.04 1.13 0.97 1.04 0.87which is #2 times #5

Discounted Cash FlowDiscounted Cash Flow

Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended Year Ended1999 2000 2001 2002 2003 2004 2005 2006 2007

Net Income 21,966 29,430 42,686 57,390 56,068 63,185 69,581 74,795 78,361Plus Depreciation 9,826 11,479 14,350 16,308 27,234 30,775 34,776 39,296 44,405Minus changes in Net Working Capital -10,184 5,789 -3,774 -4,835 -5,656 -6,146 -10,288Minus Capital Expenditures -20,200 -34,800 -45,900 -85,900 -85,000 -63,750 -47,813 -38,250 -34,425Cap Ex as % of Sales 14.25% 18.31% 18.08% 27.14% 23.16% 15.23% 10.20% 7.42% 6.18%Cap EX / Depreciation 205.58% 303.16% 319.86% 526.74% 312.11% 207.15% 137.49% 97.34% 77.53%Equals Free Cash Flow 11,592 6,109 952 -6,413 -5,472 25,374 50,887 69,696 78,053

Discounted Free Cash FlowsTerminal growth rate 3.50% -6,413 -4,966 20,928 38,162 47,564 48,414

Present value of FCF at WACC (7.85%)Sum of PV of FCF 896,085Less Outstanding Debt -85Present value of Equity 896,000Divide by Outstanding shares=value/share $9.80read this as a range +or- 10% to the value

plus 10% $10.79Minus 10% $8.82

Year Ended Terminal2008

81,92450,178-8,791

-36,1466.01%

72.04%87,164 1,238,470

54,073 698,322

Bull Story vs. Bear StoryBull Story vs. Bear StoryBear:

In February Copart was downgraded from “Buy” to “Hold” by AG Edwards, and from “Outperform” to “Market Perform” by Barrington Research. In addition revenue growth in the most recent quarter was reported to be 16% compared with past revenue growth in the 25%-35% range. In addition, a mild winter could negatively affect Copart’s business with less accidents and salvageable vehicles. Copart realizes that their growth is slowing and wants to concentrate on utilizing their capacity. However, weaker then expected growth, even after lowered guidance, could affect the stock price.

Bull: Copart is a strong company with strong management and growing market share. Their technology in their website and new services makes them an innovative company. In addition, Copart has strong fundamentals, a sound business plan and is a leader in their industry. After being beat up recently by downgrades and disappointing growth rates, Copart now has a more attractive share price. Positive announcements could move the stock higher, while worries about slowing growth are already priced in. Furthermore, Copart is actively expanding to become the dominant force in the salvage vehicle industry.

Macroeconomic Factors:Copart will fluctuate with the overall stock market, however, the salvage vehicle industry is not affected by a struggling economy as much as other companies. Therefore, there is a certain amount of protection from a struggling economy.

 

RecommendationRecommendation

Judging by Copart’s fundamentals, guidance by management, and a share price below their intrinsic value, I feel RCMP should purchase 1,000 shares of Copart stock at the market on 2/26/03.

In my opinion, Copart has a strong upside and has a great deal of excess capacity to utilize. While growth has slowed, management wants to focus on increasing earnings and utilizing capacity. Copart is a strong, growing company at an attractive share price.

Final Decision:

Purchase 1,000 shares at the market on 2/26/03.