Published: May 14, 2010

Sometimes life throws a curveball into your windshield. Or a hurricane might sweep your SUV away. In either case, owning a piece of this company provides some additional insurance.

Such is the case with Copart, Inc. (Nasdaq: CPRT), which deals in what it euphemistically terms "automobile remarketing services." In other words, if your car is totaled, Copart finds a way to salvage it, auction it off to somebody else, and make money. Of course, if it was just for the poor average Joe, Copart wouldn't truly be exploiting the market. That's why they handle this remarketing service for insurance companies, banks, charities, car dealerships, fleet operators and vehicle rental companies. Copart doesn't just deal in smashed-up cars, either. If an insurance company recovers a stolen vehicle and has already paid out the owner, then the insurance company doesn't have much use for the vehicle. They ring up Copart to take it off their hands instead.

In the old days, and this is still the case for old-school salvage companies, the cars were auctioned at live events. Copart has converted its entire auction service to the Internet, thus saving enormous amounts of capital. It also increased the number of people who can bid on the cars. This internet strategy has opened up a whole new market for Copart.

Now, if you are looking to sell your used vehicle, you can do it through Copart. If you've ever slogged through the process of trying to sell to a private party, you'll understand why this is a great idea. Even dealers will sell trade-ins through Copart. Nor is Copart just operating in the USA: it's expanded into Canada and the United Kingdom with great success, and now operates 147 facilities where it collects and distributes cars.

The key to success for this kind of business is to also offer all the other services one needs when buying or disposing of an automobile. Copart has managed to cover the range of everything a buyer or seller may need. This includes a salvage estimation service, insurance company repair estimates, transport services for cars to be picked up or delivered, vehicle inspection stations, on-demand reporting, DMV processing and a part search service.

There are risks with a company like Copart. First, as always, there is competition. All the major competitors are privately held, so there's no way to really assess their financials. It is also a heavily fragmented industry. Many of these companies have the advantage of buying cars directly from insurance companies instead of dealing with a salvage operator. The nature of any fragmented sector is that Billy Bob's Auto Salvage in Tyler, TX may have a long, personal relationship with all the insurance folks in the county. Other risks include the possibility that a major auto manufacturer decides to move into the sector, or that other competitors expand storage facilities, allowing them to become more efficient than Copart.

The truly extraordinary thing about Copart's operation is that it has been running for the past six years without incurring any long-term debt whatsoever. Given the historic credit crisis we've been experiencing, any company that can plow ahead without any fear of a credit facility being pulled has a tremendous advantage. Copart also has $162 million in cash on its books, providing the company with the flexibility to expand, to acquire other operations here and abroad, and to repurchase shares.

Copart's earnings are stellar. Trailing twelve month earnings have come in at $147 million while generating $180 million of free cash flow. Again, this gives Copart flexibility at a time when so many other businesses are restricted.

Mind you, times are comparatively tough. Copart was growing at +20% annually for awhile, but the company will post somewhere around +5% earnings growth this year. However, analysts predict a return to that +20% level in 2011, with +13% annualized growth during the next five years.

With a P/E ratio of about 22.0, the stock is fairly valued on a conservative basis. However, its strong balance sheet, 12% of shares held by insiders, and the fact t

hat two of my favorite mutual fund families (Baron and Royce) own a combined 10% of the shares convince me to allow a premium to be placed on Copart. I think it's undervalued on a long term basis and see it as a buy right now.

-- Frederick Steier
Contributor
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