Why I Think the Market Is Wrong About Copart (`CPRT`)

I spent part of this week and last week researching the best candidate for my next analysis after finalizing OCL.AX. To speed up the process, which historically ate up hours that could have been better spent actually analyzing businesses, I developed a quantitative scoring system.

The shortlisted companies were Fair Isaac Corporation (FICO), Moody’s Corporation (MCO), Fiducian Group Ltd (FID.AX), and Copart (CPRT). After tabulating and scoring them using a simple matrix combining historical financial performance, a preliminary intrinsic value calculation (margin of safety), moat evaluation and stock momentum, Copart came out on top.

The primary reasons for this score were its outstanding historical financials: net margins above 20%, a strong return on invested capital close to 20%, and virtually zero long-term debt, with debt-to-assets and debt-to-equity sitting below 1%.

One consistent pattern with this scoring model is that high-scoring companies usually boast stellar historical performance and rock-solid businesses, but they are currently going through a turmoil-induced sell-off driven by market fear. This means my first step is always to investigate what’s wrong and assess whether it’s a dealbreaker.

The crucial questions become:

What is Copart’s problem? And is it structural or temporary?

To answer this, I had to review the core business model.

At its core, Copart operates a global online marketplace that auctions vehicles, primarily on behalf of insurance companies. When a vehicle is declared a total loss, the insurance carrier consigns it to Copart, which stores it and runs the digital auction. Buyers include dismantlers, rebuilders, exporters, and used-car dealers. Copart earns service fees from insurers and transaction fees from buyers.

Consequently, Copart’s primary volume driver is not wholesale vehicle pricing, but the number of vehicles entering the insurance claims and total-loss system.

In my view, they fit the definition of a textbook tollbooth business. They operate in a duopoly alongside Insurance Auto Auctions (IAA), and right now, the stock is heavily discounted.

What Is the Problem?

Earnings have slowed down due to a reduction in total claims processed by insurance companies, resulting in fewer vehicles being auctioned on Copart’s platform. The market reacted negatively, interpreting this drop as a structural threat to their main source of income.

My initial question was whether they faced a demand problem or a supply problem.

For these guys, demand is never an issue. Whatever gets put on the auction block gets bought.

The actual bottleneck is supply. Fewer vehicles in the system mean lower revenue.

With the problem localized to supply, I began investigating why total-loss vehicle volumes had dipped. To filter out noise, I used correlation analysis over a 20-year period starting from 2006, testing variables including Copart’s vehicle supply, insurance policy growth, vehicle miles traveled, and real disposable income.

The results showed a strong positive correlation (above 0.8) between Copart’s supply and both policy growth and miles traveled, alongside a negative correlation with real disposable income.

This led to the next logical question:

Why have policy numbers and miles traveled slowed down?

Anyone who owns a car can work out the answer.

Insurance premium costs have spiked so dramatically that some consumers have felt forced to dial back comprehensive coverage in favor of third-party liability or higher deductibles. Combined with elevated fuel costs, this has compressed the volume of miles traveled and total claims, temporarily impacting Copart’s intake.

This surge in insurance policy costs, known as a hard market, is a standard phase of the insurance underwriting cycle driven largely by inflationary pressures working their way through repair and replacement costs.

Conclusion

My first-pass conclusion is that Copart’s current issue is not structural, but rather a cyclical headlock driven by inflation, fuel costs, real disposable income shifts, and the normal insurance pricing cycle, a group effect hitting the business at the same time.

Because Copart possesses a wide economic moat, pristine balance-sheet health, and secular tailwinds such as total-loss frequencies continuing to increase due to complex ADAS repairs, this temporary market hiccup appears to be providing a compelling entry opportunity and good justification to begin a deep analysis of the company.

If you are looking at Copart and hold an alternative viewpoint or disagree with my conclusions above, feel free to drop a comment below. I’m very happy to hear your thoughts.