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Copart (CPRT) Outperforming Its Industry: Still Not a Buy?

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Copart Inc. (CPRT - Free Report) is a market leader in the salvage auto auction industry. Over the past six months, shares of the company have risen 18.4%, topping the industry’s growth of 10.6%. The online automotive auctioneer has also outperformed its two closest peers—KAR Auctions Services Inc. (KAR - Free Report) and Insurance Auto Auctions aka IAA, Inc. — over the same timeframe.

6-Month Price Performance 

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With a market share of roughly 40%, Copart is the king of auto auctions. The company’s competitiveness is supported by its multiple locations (both domestic and international) and the size of its new facility openings. Thanks to its large scale, solid market leadership and continued expansion efforts, the Zacks Consensus Estimate for Copart’s fiscal 2023 sales and earnings implies year-over-year growth of 7.7% and 2.2%, respectively. For fiscal 2024, the estimates point to another 6.5% and 7.3% uptick in sales and earnings, respectively.

Salvage auction volumes are likely to remain elevated amid an increase in vehicle miles traveled and higher collision frequency. Additionally, aging vehicles and technologically-advanced auto parts are also proving to be a boon for industry participants like Copart. The costs of replacing such sophisticated components are extremely high, prompting insurance agencies to declare the vehicles as total loss. The expected increase in total loss rates bodes well for Copart’s top-line growth. 

The buyouts of AVK and Vincent Auto Solutions have expanded Copart’s portfolio and foothold. Expansion initiatives along with digital ramp-up will aid Copart in fast pickup across the country, fueling growth in a competitive marketplace. The launch of Copart Max has further stepped up its digital game. The company’s strategic partnership with CHAMPtitles to introduce an automated digital platform for car sellers also bodes well.

The firm’s strong balance sheet with low leverage and high liquidity provides it with financial flexibility. Copart’s total debt to capitalization stands at 0.04%, compared with the industry’s 8%. At the end of the first quarter of fiscal 2023, the company had $2.8 billion of liquidity, comprising $1.5 billion in cash/cash equivalents and an undrawn credit revolver of more than $1.2 billion.

While the abovementioned tailwinds and its performance on the bourses compared to peers may tempt you to invest in the stock, perhaps it may not be just the right time to add CPRT’s shares to your portfolio yet.

Copart is bearing the brunt of high costs, rising capex and forex woes which are likely to clip its margins and cash flows going forward. The company is making elevated investments to support growth initiatives, including the expansion of the business in international markets and the United States. It has been doubling down on storage-capacity expansion. In the last reported quarter, capex amounted to $152.7 million (more than double the prior-year quarter levels), 80% of which was related to capacity expansion. Copart will continue to prioritize expansion efforts, which, although necessary and advantageous for the long term, are likely to clip cash flows.

The company is also struggling with increased labor and temporary storage costs. Operating costs have also been on the rise for several quarters amid increasing G&A expenditure and the trend is set to continue. In fiscal 2022, the company’s G&A expenditure increased 18.2% year over year. Also, Copart’s presence in various international markets makes it vulnerable to foreign currency fluctuations. In the last reported quarter, the company saw a currency headwind of more than $23.6 million due to the dollar's strength. Forex woes will continue to weigh on international buyers as a strong dollar amid stubborn inflation would translate to less international revenues in dollar terms.

From the valuation standpoint, Copart’s P/E ratio of 28.18 is higher than the industry’s 25.80. It’s also worth noting that while high average selling prices are good for Copart, there’s a caveat to it. When used car prices are higher, it makes more sense to repair a car than to deem it a total loss, thereby impacting Copart's supply. This decreasing loss frequency ratio could prove as a headwind for the company. Notably, high used vehicle prices have negatively impacted the total loss frequency of Copart and have tempered overall insurance volume growth. Total loss frequency in the last reported quarter was down approximately 220 basis points from the corresponding year-ago quarter.

Considering the near-term headwinds and pricier valuation (compared to the industry), it is better to wait for a pullback to load up more shares. As of now, we recommend holding Copart shares. The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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