Making money out of vehicles that have been involved in accidents may not sound the most glamourous of business models, but it is the bread and butter of Copart – the market leader in running online salvage vehicle auctions in the US and globally.
After a vehicle is involved in a collision, damaged in a storm or stolen, in around 20% of claims it is deemed uneconomic to repair and consequently gets declared a ‘total loss’ and the insurer accepts ownership.
Copart helps solve the auto insurance industry’s problem of how to store these ‘total loss’ vehicles and liquidate them efficiently for the best possible price. Over time, it has built a massive network of salvage yards for vehicle storage.
The business model is inherently attractive. It predominantly acts solely as an agent, connecting sellers such as insurance companies with buyers such as dealers and dismantlers via its patented 100% online auction platform. It extracts fees from both buyers and sellers for the sales that it helps facilitate.
Under this agency model, Copart stores salvage vehicles at its yards but mostly doesn’t take ownership of them, therefore largely avoiding inventory working capital needs and associated risks.
Copart has scaled impressively since its foundation over 40 years ago to have 250 locations in 11 countries. It sold more than four million units in the past year. By effectively prolonging the lives of vehicles, Copart is an enabler of the so-called circular economy.
Copart possesses several strategic competitive advantages. In the US, the salvage market has consolidated into an effective duopoly so that there are only two major players; we estimate Copart has over 50% market share.
Copart has a physical and technological competitive moat. It has about 19,000 acres of land zoned for salvage and owns the vast majority of it outright, unlike its major peer which tends to lease its land. The land is a huge barrier to entry. The industry is effectively restricted on supply as obtaining permits to use land as salvage is incredibly difficult.
The business also enjoys strong network effects. It was early to go 100% online and it now has a global buyer base of over one million buyers across 185 countries, helping insurance companies sell salvage vehicles for the best possible price and therefore lowering their effective claims costs.
Copart talks about a flywheel effect where the growth of the buyer base has driven strong liquidity to its platform, with that pool of buyers driving strong pricing, in turn reinforcing Copart as an attractive platform for sellers.
The company benefits hugely from scale economics. Investment in growing its buyer base and delivering service excellence to insurers has helped drive a superior sales run rate and profitability compared to peer IAA.
Copart consequently produces more cashflow which it reinvests into its business. This has meant Copart has materially invested over time into land, creating ever stronger network density and limiting towing costs to Copart’s yards. Copart’s reinvestment culture can be seen to reinforce its competitive edge.
We believe Copart can leverage several growth drivers. Cars today have much more sensors and equipment than previously. This is particularly the case for electric vehicles. Combined with ever increasing labour costs, this is making it more likely that cars are uneconomic to repair and declared a total loss, driving higher volume to Copart's platform.
Safety features within cars are clearly worth monitoring, but distracted driving including the use of mobile phones is limiting the effects of the new technologies on accident frequency rates.
Copart is also having success in growing its non-insurance volumes which are now about 20% of its mix, including striking deals with car rental companies and from finance companies dealing with repossessed vehicles. It is making good progress internationally, with particular success in the UK and Germany.
Accidents happen regardless of economic conditions and Copart has managed to grow its profits well through different economic cycles.
Copart's founder Willis Johnson is still involved today as co-chairman, alongside his son-in-law Jay Adair. The management team has been very stable and has made astute capital allocation decisions.
In the past 10 years alone, the stock has compounded at over 28% per annum. It now boasts operating margins above 35% and a return on invested capital of around 18%. Its balance sheet with around $3.4bn net cash provides considerable financial flexibility.
Copart’s strong management and its competitive advantages position it well to drive continued financial success and we were recently introduced it into our Global Best Ideas Equity fund.
Gerrit Smit is head of global equity management at Stonehage Fleming Investment Management. The views expressed above should not be taken as investment advice.