Copart: Digging a Wide Moat From Junked Vehicles

We are initiating coverage on salvage vehicle auctioneer Copart CPRT with a wide moat and a $77 fair value estimate. We see the firm as a phenomenal business with only one large competitor in IAA, which RB Global (formerly Ritchie Bros.) acquired in March. Copart operates vehicle auctions after vehicles are declared totaled, providing an online-only marketplace that optimizes liquidity for sellers, primarily insurance companies, and buyers such as dismantlers, used vehicle retailers, exporters, and private individuals. This highly liquid marketplace helps create a network effect as sellers benefit from a wide buyer network due to increased bidding competition, and buyers benefit from higher vehicle volumes.

Around 20%-25% of Copart’s owned acreage is likely sitting idle at any given time, allowing the firm to quickly absorb capacity after a major disaster. For potential new entrants, obtaining land creates an initial capital and regulatory hurdle and operating idle land creates a fixed cost hurdle that is difficult to overcome without scale. Copart currently operates about 16,000 acres of land (90% owned, 10% leased) and IAA operates about 12,000 acres (10% owned, 90% leased). We believe Copart’s land ownership is critical to its moat and advantageous over leasing. By owning land, the company is not required to regularly renegotiate lease terms and compete with more lucrative uses of the leased land for landowners.

The firm has grown its top line nearly five-fold since 2009 due to a combination of significant land expansion and robust service quality to drive higher salvage vehicle volume. Copart receives most of its vehicle volume through contracts with large auto insurers and sells them on consignment for high margins. Therefore, the company prioritizes maintaining amicable insurance relationships which are fostered by having adequate storage capacity and being a flexible service provider. The company likely holds about half the U.S. salvage vehicle auction market.