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Copart’s growth has slowed, but its cash flow is fantastic – the perfect scenario for a PE deal.
Many years ago, I came across a company that managed to scale a business idea that made lots of sense. What happens when cars get totaled? The insurance company pays you for the loss and takes the car.
But WHERE does it take the car? To car heaven? No, it gets sold to a company like Copart (NASDAQ:CPRT), an auto salvage operator. Copart might then tear the car apart and sell the metal and the parts. It might simply sell it at auction. Whatever it chooses to do, it made money.
Copart then expanded its footprint so it had salvage yards all across the country. Then it moved onto the internet to streamline operations It purchased a few salvage operators here and there. It has since scaled and become the largest operator in a heavily fragmented business. Oh, and it has expanded into the UK and Brazil. 22% of vehicle sales now occur to buyers outside the US.
The company now offers over 100,000 cars and trucks for sale on its website, not just to auction dealers but to the general public who want to participate in the auction. By moving the auctions onto the internet, it increased competition for vehicles and boosted their selling price.
Copart makes its money by generating fees from both buyers and sellers, as well as towing and storage. Auto industry trends have been to build cars more in a “unibody” format, so they become a lot more expensive to repair since one broken element in the body means the whole body has to go.
It’s one of the few businesses that does really, really well when bad things happen, like car accidents and hurricanes.
Copart was tearing up earnings estimates up until a few years ago. It was growing EPS at 15-20%. Now things have settled down. It’s taken on some debt to continue expanding and refining. Growth has slowed. It missed estimates.
FY14 net income was down 0.7%. It is expected to increase 13% in FY15 and 11% in FY16. So at the moment, with the stock at about $33, it is trading at about 20x FY15’s estimates. That’s a bit pricey for the company stock at this point.
But it may not be for private equity firms.
Private equity firms often hunt for companies that have a leading position in their sector, are still growing but perhaps not as fast as they used to, have strong balance sheets, and that may have excessive expenditures that can be cut. Most of all, PE firms like to buy companies that have robust cash flow. By cutting expenses and optimizing operations, they can boost that cash flow and earn back the money they spent to buy the business more quickly.
Copart has $159 million in cash and $303 million in debt, which it is paying down. FY14 operating cash flow was $263 million and free cash flow came in at $170 million. It is the cash flow number investors should keep an eye on. FY12 saw FCF of $175MM, and FY13 came in at $70MM.
Private equity has its eyes on Copart. I think a buyout is likely at some point. It’s hard to say when, but if it happens, it will be for a premium because of Copart’s market-leading status.
It’s a great company as is, and while a bit pricey for the moment, consider buying in on a dip for modest returns going forward and a buyout in the next 2-3 years.
Lawrence Meyers does not own shares of CPRT.
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