Markets

This Auto Salvager Is No Wreck

Through online auctions and a network of junkyards, Copart profits handsomely from damaged, repossed and totaled cars.

Ever wonder what happens to totaled cars that insurance companies deem irreparable? Chances are, they end up in the hands of a company called Copart. Copart (symbol CPRT) is the top auto salvager in the industry, with a market share in North America of roughly 40%. The company is realizing the benefits of the investments it made in real estate and technology a few years back.

Copart is a middleman between insurers and used-car dealers. Through a network of junkyards, the Fairfield, Cal., company connects insurers who call damaged or recovered stolen vehicles a total loss because it will cost more to repair than to junk them with dealers who want to repair and sell the cars for a profit or strip them for parts.

Copart also conducts auctions for damaged rental and repossessed cars. Copart collects a fee on each car sold, although it does not take possession of the vehicles it sells in North America. "That's a great business model," says Eric Ende, manager of the FPA Paramount fund. "It reduces the capital commitment needed."

To sell the cars, Copart uses an online system called virtual bidding, or VB2. "It was a hell of a gamble when Copart introduced it," says Gary Prestopino, an analyst with Barrington Research. "But the company has basically converted the business to a very fast eBay model."

The online system has helped Copart conduct more auctions and cut its payroll. It also attracts international buyers to auctions. Earlier this year, Copart introduced a similar program for retail consumers to sell their vehicles directly.

These initiatives are clearly working. In the quarter that ended April 30, the company reported that revenue soared 52%, or $221 million, from the same period a year earlier. Earnings rose 27%, to 52 cents per share, beating the average analyst estimate of 48 cents. Analysts project profits of $1.74 per share for the current fiscal year, which ends July 31, and a 17% gain, to $2.03 per share, for the 2009 fiscal year.

Copart is in a strong competetive position. "You need a whole network of yards where you can store cars all across the country, and Copart has that," says Ende. Moreover, he says, the growing complexity of cars increases the likelihood that cars involved in accidents will wind up in the "totaled" bin.

Copart's most powerful growth engine stems from its foray last year into England, where it operates 15 sites and plans to add five more. Next on Copart's agenda is continental Europe. "Any potential spike in earnings would come from Europe," says Ende.

One speed bump: Because of high gasoline costs, Americans have cut their driving by more than 40 billion miles over the past seven months, according to the U.S. Department of Transportation. That should mean fewer accidents and fewer totaled cars, which Copart relies on to run its business. Yet the stock's fans argue that expansion across the pond should more than offset any declines in the domestic accident rate.

Copart's shares have been strong performers. The stock, which sold for as little as $7 in 2003, closed July 29 at $44.33. At that price, it sells at 22 times estimated earnings for fiscal 2009 and is "fully valued," in Ende's view. Yet, having generated annualized earnings growth of 21% over the past five years, according to Value Line, and with more double-digit growth in the offing, Copart holds a lot of appeal for investors seeking a steady player in a wobbly economy.

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