Copart: Owner-operator with deep moats but potential long-term risks

In March 1994, Copart became listed in NASDAQ. Since then, the company has generated 19,492% (21.7% CAGR) return for its shareholders.

This eye-popping wealth machine was founded by Willis Johnson, who, in many ways, personified the American dream. He was not handed a particularly good hand in life. His father could not read which created many obstacles in his father’s numerous entrepreneurial pursuits. Willis not only got the entrepreneurial genes from his father but also went onto finish high school. With the power of literacy, folksy wisdom, and good old common sense, he founded Copart in an industry that I do not think many Ivy league college grads are looking for work or trying to start a company to compete against Copart. After all, there is hardly anything appealing about auto junkyards. Well, it turns out it is a pretty darn good business which created this ginormous amount of wealth for Copart shareholders.

When I posted on twitter a few weeks ago that I am covering Copart for my next deep dive, one of my followers (who prefers to remain anonymous) sent me his detailed notes on the company. He actively followed the company for quite sometime and his firm owns Copart in their portfolio. We later had an hour-long call discussing Copart. I absolutely love these serendipitous interactions that help me get better as an analyst. Some of the points mentioned in this deep dive are borrowed from the aforementioned analyst although in some cases, our conclusions diverged.

Here is the brief outline for this month’s deep dive.

Section 1 Copart business model: I briefly discussed Copart’s business model and how the auction model works.

Section 2 Critical drivers for Copart economics: I elaborated on the three key demand drivers for Copart: Miles driven, accident rates, and salvage rates.

Section 3 Copart moats: I identified five sources of competitive advantage for Copart: The NIMBY effect, So-Much-Land, Liquidity of the auction marketplace, international expansions, and the Copart culture.

Section 4 Management incentives: Copart’s history of alignment of shareholder interest and management is something that would warm any analyst/investor’s heart. Just the kind of dynamic you would expect in a company that is run by actual owners.

Section 5 Valuation and model assumptions: I explored the embedded expectations in the current stock price and mentioned some of the concerns I have.

Section 6 The big threat: I focused on the AV/EV threat to Copart’s business model and touched on four specific questions: a) will level 4/5 AV ever be possible? b) If it is possible, what is the timeline? How long will it require to replace current fleet? c) At full penetration, how will AV affect crash rates in the future? d) will AV/EV lead to higher (or lower) total loss frequency?

Section 7 Final Words: Concluding remarks on Copart and a very brief discussion on my current portfolio.

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