TIP845: Copart Stock (CPRT): Is Copart Now a Buy? w/ Daniel Mahncke & Shawn O'Malley

Daniel Mahncke and Shawn O’Malley revisit Copart (NASDAQ: CPRT), the online salvage auction giant that turns totaled cars into a global marketplace, connecting insurers with more than a million buyers across 190 countries. Copart owns over 250 salvage yards outright — land that’s increasingly difficult to permit today — and compounded earnings per share at over 20% a year for a decade. But the stock is down more than 40% from its highs, U. S. insurance volumes have fallen for four straight quarters, and its main competitor, IAA, has now outgrown Copart for six straight quarters. Daniel and Shawn dig into what actually broke. Is the volume decline cyclical, driven by Americans dropping insurance coverage after premiums rose ~50% in three years — or structural, as Progressive becomes America’s largest auto insurer while sending three-quarters of its salvage to IAA? They also cover why founder-era CEO Jay Adair returned after four years away, why Copart just bought back $1.6 billion of its own stock after five years of nothing, and what a rumored acquisition of CCC Intelligent Solutions would mean for a company that has never carried meaningful debt. In the end, Daniel updates his valuation model and decides whether Copart earns its way back into The Intrinsic Value Portfolio. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:02:29) What changed since our last episode on Copart (00:14:22) How Copart’s moat works (00:23:37) Whether Copart’s moat still exists (00:26:14) Whether competition actually gained market share (00:45:28) What new CEO Jay Adair wants to change (01:03:53) How much Copart stock is actually worth (01:10:29) Whether CPRT will be added to The Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Mastermind Community⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn more about how to join us in NYC for our ⁠⁠⁠⁠⁠⁠⁠⁠Intrinsic Value Conference⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠⁠. Our original deep-dive on Copart. Value Investor Club Long Thesis. Value Investor Club Short Thesis. Check out our previous Intrinsic Value breakdowns: Auto1, Lyft, Exor NV. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠⁠⁠⁠⁠sponsors⁠⁠⁠⁠⁠⁠⁠⁠: Monarch Plus500 Netsuite Plaud References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast, episode 845. And Sean, the last stock I pitched to you was Palantir, and that came as a surprise to many, but I was definitely surprised by the quality of the company, at least by the part that we could understand. And it wasn't too technical for us.

• 0:21Speaker 02

  I've got to admit, a little secret to you, Daniel. I still don't really know what ontology means, if we're being completely honest.

• 0:28Speaker 01

  Well, actually, the weekend after our recording, I listened to a five-hour-long German podcast, which also covered police work in Germany, and they mentioned Palantir, and that was quite fascinating.

• 0:39Speaker 02

  Daniel, five hours? Come on. I thought our breakdowns were getting a little lengthier. I'm guessing that you raced through it at like two times speed.

• 0:47Speaker 01

  2.85. I actually got to say, I love that YouTube feature where you can manually set the speed instead of having these 0.5 jumps. And I'm not even sure whether that's part of YouTube Premium or just normal YouTube experience. But anyway, the podcast was about a police officer who talked about how it took him months to come up with a sort of mindmap of a criminal organization, and how if he would have been allowed to use Palantir, it would have simply taken him a couple of minutes. And that felt like a very tangible example of how just going through the databases of all of these agencies can simplify the day-to-day job of police officers, but also different security agencies. And that's basically, you

• 1:29Speaker 01

  know, the mindmap that we talked about, the ontology that Palantir uses. But that was just my off-topic tangent on Palantir. So let's go to today's company, which is Copart.

• 1:40Speaker 02

  Away we go.

• 1:45Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Daniel Manca.

• 2:31Speaker 02

  Perhaps we should start with our own history with Copart. You pitched the stock in October of last year, and at that point, Copart was already down 30% from all-time highs. But as we know today, there was still some room for even more pullbacks beyond that. And we don't try to time the market, and we didn't sell because we speculated on where the stock was going to go in the next few months. But it did feel like the right decision to free up some capital by selling Copart to invest it elsewhere. And the stock has had a rough time since then, which makes the decision look prescient, even if it was mostly just random luck.

• 3:10Speaker 01

  I think it's always random luck whenever we make buy or sell decisions. No, but jokes aside, I mean, Copart has been a 2% position back then when we bought it. And just for context, a 2% position usually means it's sort of on probation. So we're basically not yet completely sold on it, either because of valuation or simply because we have some quality concerns. And I think I could speak for the both of us when I say that with Copart, it was certainly the former. I think we all know the quality is quite high. But as you said, the stock was perhaps fairly valued, definitely not cheap at that point. And I feel like sometimes you also just need to zoom out and simplify so you don't miss the most important things. And if you do that for Copart, you will find out why the stock

• 3:51Speaker 01

  is where it currently is, which is that top line growth has been slowing down dramatically if you look at the last two or three years. So that was, you know, the major common denominator in our Biggest Loser episode just a couple of weeks ago, that stock prices tend to follow top line growth, and Copart's slowed down from just mid-teens to basically no growth at all.

• 4:12Speaker 02

  That's the story for today. Thanks for tuning in, folks. No, I'm joking, of course. What is interesting for Copart, I think, is that while they have the reputation as being one of these high-quality compounders, they have had these growth slowdowns before. And we're used to the software charts by now that only go in basically one direction, up and to the right. But Copart is fundamentally a more cyclical business. And so the last time revenue growth stalled out was in 2015. But again, that was not fatal to shareholders by any means. And to be fair, it does help that earnings per share grew consistently despite some revenue volatility. But before we get deeper into the numbers and what has

• 4:55Speaker 02

  changed since our first time pitching the company, how about you just give us a little summary of the pitch for Copart first, so we're all on the same page?

• 5:05Speaker 01

  Yeah. So if I had to summarize Copart's business in just one sentence, it would probably be that Copart is a marketplace for total cars. So every year, millions of cars reach the end of what you can call their useful life, whether that would be through a crash, or a hailstorm, a flood, or just because of old age, which is most often the actual reason. But most of those cars, they go to an insurance company. And those insurance companies are essentially Copart's main customer base. So they want to get rid of the car, and Copart takes care of that by connecting the seller, which is the insurance company, with a potential buyer. And buyers usually include, you know, dismantlers or recyclers, used car dealers, international exporters, auto repair shops, but also individual, let's

• 5:48Speaker 01

  say hobbyists or private buyers from basically all around the world.

• 5:52Speaker 02

  Many cars sold through Copart to private buyers actually end up on South American streets, for example, from what I've heard. I think when we first did the episode, you'd actually just gotten back from a little vacation in the Dominican Republic. And I remember you saying that a lot of the cars there looked like they could have been from a Copart lot.

• 6:10Speaker 01

  Yeah, I think emerging markets tend to be where Copart's cars are being bought by private buyers. So there were definitely some cars in the Dominican Republic that wouldn't have passed the German TOF. And I actually talked to you about it before the episode, because I hoped you might know what the German TOF actually is. You didn't. And so just for context, for the American listeners, the TOF is the Official Technical Inspection Association in Germany. And I've Googled it, and apparently there's no equivalent in the US. And car safety for you guys is more of a state-to-state department thing, I guess. But you can think of it as every single German car has to go to the German TOF, and only if they approve, you can actually drive it on the streets. And I should add that in its core business, Copart doesn't take ownership of any of the cars. So it's

• 6:53Speaker 01

  just a marketplace that, as part of its service, also handles the logistics, which is kind of like Amazon, but for used cars. So Copart tows the vehicles, they, you know, park them in one of their yards, they photograph them, they handle the paperwork, and then they run the auction where they actually sell those cars. Then they basically take a fee from both the seller side, so those are the insurance companies, and the buyer side, which, for example, could be, you know, a dealer.

• 7:17Speaker 02

  And just to run through a quick example, so we're all on the same page. Let's say you get rear-ended, and your insurer now has a decision to make, either repair the car or write it off and pay you out. And if the repair costs, let's say $5,000, and the insurer thinks it can recover more than $5,000 by selling the wrecked car, it writes the car off and sells it. And if not, it repairs it. And so in the industry, you call the outcome of that decision, the total loss frequency, the percentage of accident claims, where the insurer decides the car isn't worth repairing. And the higher the total loss frequency, the better it is for Copart, because that means they're getting more cars coming into their platform.

• 8:01Speaker 01

  And the interesting part in the last decades is that this has been a major tailwind for Copart. So Jay Adair, who is the old and also the new CEO, and we'll explain that later on in the episode, he recently said in an investor call that the total loss frequency, when he started, which was about 35 years ago, was only 8%. And today, it's almost 24%.

• 8:22Speaker 02

  Which is counterintuitive at first, because you would think that cars have become much safer, leading to fewer catastrophic accidents, which again, should lead to fewer total cars. But actually, the modern car is packed with expensive sensors, much to my mom's chagrin, who has a new car and hates it. Cameras in the mirrors, radar in the bumper, parking sensors, lane assist, all that stuff does in theory help make the car safer, but it also makes the car itself more fragile and expensive to fix, because after a collision, every one of those sensors has to be recalibrated, which costs a lot of time and a lot of money.

• 9:00Speaker 01

  There are a lot of these photos of, I think mostly Teslas, but that's just because they are the most modern cars out there right now, where you just see a minor accident happening, and then suddenly the car's totaled. And it looks completely fine, to be honest. There's just some, you know, cameras that were hit, and even that can total a car by now. But another interesting point that the ex-CEO, Jeff Liao, made in one of his latest earnings calls, is that Copart is not only a passive beneficiary of, you know, an increase in the total loss frequency, but they actually help drive it upward. So basically, every additional dollar that Copart gets for a car at an auction makes it more attractive for insurers to just total the car and then send it to Copart for auction. And he sort of framed it as basically competing with the repair shops, right? Every car that goes

• 9:45Speaker 01

  to Copart and doesn't get into a repair shop is a win for them. So the higher the returns Copart generates, the more often it wins the right to resolve that claim instead of that car going to the body shop. And it's a great system, because it also aligns Copart and the insurance companies much better. So not only is it more profitable for the insurance business to give Copart the cars and the volume, but Copart's fees also scale with higher sales prices. Then on the seller side, they often use, and I think I mentioned that last time, something that is called percentage incentive program. So basically, that means that Copart's fees is a percentage of the car sale price, and buyer fees typically range from 7% to 13%, depending on the car and the buyer's volume.

• 10:28Speaker 02

  And as we mentioned last time, roughly 80% of the fees come on the buyer's side, not with the insurance companies. And the reason behind that is there are only about a dozen insurance companies of size. So it's a very concentrated group of suppliers with pretty high negotiating leverage. And then on the buyer's side, you have thousands of dismantlers and dealers and exporters. So it's highly fragmented set of vehicle buyers and there's little to no negotiating leverage correspondingly. But besides the core business with insurance companies, there's also a second business called vehicle sales. So maybe you can explain what that is and the overall revenue breakdown for the company, what that looks like.

• 11:10Speaker 01

  Yeah, so as you said, basically, the vast majority of revenue comes from service revenue, which is the business that we just discussed. And it's called service because again, you know, Co-Part is doing a lot of the logistics and they basically take on what otherwise insurance companies would need to do. That's why they call it service. The other 15 or so percent of the business come from what they call vehicle sales. So that's the part of the business where Co-Part actually takes ownership of a car and then sells it through its own channel. So that model is a lot more common in Co-Part's international businesses. And again, we talked about that last time. Mostly that's the case because the service model is established in the US, but it's not yet widely adopted in most international markets. And to show international customers the advantages of selling on Co-Part, which again primarily

• 11:52Speaker 01

  comes from the liquidity that the auction offers, they basically buy cars outright and then sell them as proof of the model in their own auction. And basically the goal is that over time, they can convert them into the fee or the service model, which is a much higher margin business for Co-Part. And this works quite well. International service revenue is up almost 20%, while vehicle revenue is dropping close to 20%. Now, obviously you might ask yourself, why is it good to see revenue drop? In this case, vehicle revenue. But the reason is that that means international markets are in fact adopting the higher margin service model, which is what you want to see. Actually, in one of the latest earnings calls, they point out Germany as an example because Germany's model is completely different from the US model.

• 12:34Speaker 01

  So when a car is deemed a total loss here, the insurer traditionally pays the policyholder the replacement value minus the wreck's residual value. And then the policyholder keeps the wreck basically and has to sell it themselves. And that's a pretty bad model because you know, at the end, you're still sitting on your total car and you have to deal with selling it yourself. I should add though, this is not always the case. Unfortunately for us, my dad just crashed his car recently and the entire side is a huge scratch and you basically need to completely new doors for the entire side. And with him, the insurance is basically not just giving him the money, but sending him to a body shop and they will repair it for him. And that's sort of what the insurance is then covering.

• 13:15Speaker 02

  Just to ask, is this all related to what I think you once told me in our Auto One episode that we did a while back? You said that many cars go to Eastern European countries for cheap repairs and then eventually come back to Germany without any mention of the actual damage. It sounds like your dad had no problem damaging the car himself, but my impression is that this is sort of a bigger problem in Germany.

• 13:41Speaker 01

  Yeah, what could have technically happened is that the insurance pays him the money if they would have done so, then he would get a cheap repair, let's say in Poland for the doors, then he gets the car back and he has the money and then he could sell that car, you know, with sort of not telling about the actual damage. And that's how you can make a profit. Of course, it's illegal, but yeah, that's what we discussed in the Auto One episode. Co-Part is now convinced some of the biggest insurance companies in Germany to switch to its service model. And since Co-Part has less than 10% market share and actually no real competitor in Europe, this could be a huge opportunity because you don't have a duopoly, which we'll get to in the US, where basically insurers will always split the volume. In this case, all the volume and all the growth is only going to Co-Part in the future.

• 14:24Speaker 03

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• 17:31Speaker 03

  All right, back to the show.

• 17:33Speaker 02

  Margins are already up significantly for the international business while US EBIT, which is, you know, earnings before interest and taxes, it's just a fancy term for operating profit. It's up less than 4%, which is not particularly inspiring, while international EBIT was up 50% year over year. So we're seeing an explosion in the operating profits from Co-Part's international business. But moving on here, how about we go ahead and continue the conversation and talk about Co-Part's moats? I think there's a reason we liked the business enough to include it in the portfolio, even if it was only there for a short while.

• 18:13Speaker 02

  And also regarding our decision to potentially add Co-Part again today, back to the portfolio. I think the most important thing for us to know is whether the moat is still intact.

• 18:25Speaker 01

  Yeah, and I would say that the first one is still intact. And I feel like it's one of the things that everyone knows about Co-Part right now. And it's actually Co-Part's land. So it's all the yards that they own. I've literally heard people say they've never looked at Co-Part, they've never looked at the company, they don't know anything but the fact that they own their land, which is kind of funny because I think like every Co-Part pitch is initially starting with, hey, the one great thing, the one mode is they own their land and their competitors don't. But you just can't skip that part, even though it seems repetitive because again, Co-Part operates in the US in a duopoly with IAA, that's their main competitor. And IAA doesn't own its land, it's renting the land. And as we'll see later, when we talk about the financials a bit more, that is a major factor.

• 19:06Speaker 01

  There's also a limited amount of land that still can be turned into a massive salvage yard. And since Co-Part owns 250 of such locations globally, the majority of them obviously in the US, it's increasingly hard to, you know, get the same sort of expansion in terms of yards for any competitor.

• 19:23Speaker 02

  Yeah, the good old NIMBY movement, not in my backyard. And look, last time we recorded this episode, I was not yet a homeowner and now I am. And I can tell you, I'm probably more team NIMBY than I was just a year ago. I could imagine really only a few things that are probably worse than getting one of those massive salvage yards anywhere near my house. And I'm sure really everybody feels that way.

• 19:47Speaker 01

  Up until now, I only have seen photos, but in about, what is it? A month from now, I will actually visit you. So I'll see the backyard in real life and I can say that I think if I would have a backyard like that, I wouldn't want a salvage yard anywhere near that either. And because every homeowner thinks that way, obviously the permits to get for those yards, it's incredibly difficult and it's only getting more difficult in the future. And obviously also you can sell that land at a much better price when it's for housing or for office spaces. So there's just not really an incentive to still, you know, give a lot of permits for land that is then turned into a junkyard. So to some extent, again, this is a competitive advantage that IAA can no longer attack. And that's true today, but it will also be even more true in five years' time.

• 20:30Speaker 01

  And I should mention, and this is kind of bullish in my opinion, that Jay Adair said in his first call back as a CEO, which has happened about a month and a half ago, that Co-Part now has enough land and no longer needs to spend at least this half a billion dollars, which it currently are spending to acquire more land. So I think that's a pretty good sign because if you just look at the financials, $500 million is quite a significant amount, even for a company the size of Co-Part. So for example, last year, Co-Part generated free cash flow of 1.2 to 1.3 billion. So even if, you know, the spend is just cut in half, which means $250 million of savings, that's quite a meaningful chunk for Co-Part.

• 21:07Speaker 02

  And the second moat is something that we've seen in many businesses that we looked at. And it's just about the marketplace dynamic. They launched a website and auctions in the mid 90s. And just a couple of years after eBay is when they did that. And at that point, it's safe to say that most salvage yards were still running auctions in person with a guy and a clipboard, probably overseeing things. And that's why Copart had a major advantage in onboarding customers. There was sort of a digital first mover.

• 21:36Speaker 01

  I still remember when I first looked at Copart and I kind of asked myself when no one even tried copying them, even IAA, which again is their main competitor, only started really getting into online auctions during the pandemic. So we're literally talking 25, almost 30 years later. And I think that's just a pretty good example of how mismanaged that company has been for a very long time. And anyway, you know, the website and also the virtual bidding system, which has sort of been this, you know, innovation that Copart had turned into a massive advantage because more bidders, and that's sort of the dynamic that you just described, more bidders mean the winning bid goes higher than, you know, if you have fewer people bidding on an auction. And higher prices mean the insurance company recovers more money, which means Copart becomes

• 22:20Speaker 01

  the most profitable place for an insurer to dispose of a car, which is what we talked about earlier. And that brings in more insurers, which in turn brings in more and better inventory for Copart's side. And if you can get better cars and maybe not the most wrecked ones, you'll obviously also get more buyers. And that's sort of the flywheel that we're always looking for in all the companies that we cover. And I think it's safe to say that Copart is one of the strongest flywheels that we've ever seen in all of the companies we've covered, which by now is close to 100, by the way.

• 22:48Speaker 02

  And last but not least, as we think about Copart's moats and the advantages that insulate them from competition, we have economies of scale to consider, especially thanks to the density of their yard network. Basically, the denser the network, the shorter the distance to the next yard when you have to pick up and tow a car. And it's sort of like the Domino's model of trying to have as many locations as possible in population dense areas so that it's as close as you can possibly be. The delivery time is, you know, less than a few minutes. That sort of accessibility is an advantage.

• 23:25Speaker 01

  Yeah, and in this case, it's essentially both. It's a cost advantage, but it's also about reliability. I mean, last time, I think we talked about Hurricane Katrina, which was a game changer for Copart. It basically left hundreds of thousands of vehicles in salvage condition. And while salvage vehicles are usually a good thing for Copart, too much volume at once, which tends to happen in these catastrophe events, is not that good for them because you have to handle it. And that means you have to lease extra yards, you have to hire third party services and work many overtime hours. And obviously, all of that comes at a time where the costs for yards for third party services and so on are much higher than usual. And then in the short term, that means that, you know, all of these vehicles, they are unprofitable volume for Copart.

• 24:09Speaker 01

  And that's why competitors, and especially IAA, didn't want to go the extra mile to help back then. And Copart, they chose to absorb the losses and help as much as they could and as fast as they could. And actually, I found a quote by Willis Johnson, who is the founder of Copart. And he said that they wanted to prove they're not only the best operator, but also the most reliable partner. And I actually think if you look at how many customers Copart still has and how they stick with them, you can still see that credit that it gave to them 20 years later. Because again, the hurricane happened in 2005. This was also just a year or two after Copart shifted the entire business to online auctions. So it was also a huge test for the new system.

• 24:52Speaker 01

  And it worked out well with tens of thousands of flood damaged cars proing into the market. And Copart's digital infrastructure allowed buyers globally to bid on cars, which, as you said before, was basically a national operation, right? Now suddenly you have the entire world. Internationally, you have buyers for those cars. And all of that helped bypassing the logistical bottleneck of physical auction laws. And after that, Copart established what they call a CAT response team, so a catastrophe team, basically, that can help further and faster when these hurricanes come up.

• 25:25Speaker 02

  And so this was a major part of why Copart was able to win market share for almost two decades after that. Insurers trusted Copart and knew it was not only the best place to sell volume, but also a reliable company in times of crisis. And it's really important for insurance companies to get quick help in those situations because that's exactly when they could lose a ton of customers if things are handled poorly. So the last thing you want is to wait months for your insurance company to pay you while already struggling with losing your car and maybe your house. So if the service is bad in those times, you know, insurance companies, they're probably going to lose thousands of customers. So it's a real point of vulnerability for them.

• 26:07Speaker 02

  But perhaps this is maybe a good moment to change the tone a bit and start talking about what has changed since our first episode. What is different now about Copart? Because there is the market narrative that market share dynamics have changed and IAA, which is Copart's chief competitor, is now gaining market share. And so in our last episode, again, we talked about IAA and how it's closed the land capacity gap slowly. About five years ago, Copart still had 70% more land capacity than IAA. Now that number is close to 25%.

• 26:45Speaker 01

  And I should add, if you ask yourself, well, Daniel just said five minutes ago that the land capacity will be a major moat for Copart even in the future. Obviously, there's a difference between scaling land because you lease it compared to scaling land or yards because you buy them, right? Nevertheless, I gotta say, apparently they did a quite good job for the last few years. I mean, I think what the market is scared about right now is Copart's slowdown in the US insurance volume. So basically, the core of the business. Part of that can be explained, fortunately, because there were no major hurricanes this year, which is good for society. It's not that good for Copart. I mean, talk about incentives. But even if you exclude natural disasters, the overall decline year over year would be about three to five percentage points.

• 27:27Speaker 01

  And while Copart's volumes are declining, IAA's volumes have actually been up 10%. So it's not only that fewer cars are being totaled, it's also that IAA is taking share from Copart, which, as you mentioned, didn't happen for, let's say, 20 to 25 years. And IAA's management is actually claiming they have outperformed competition, which basically means Copart for about six quarters in a row now.

• 27:48Speaker 02

  So what changed there that you have insurers suddenly switching over to IAA? I mean, it seems like the moats we've been discussing are still largely in place. I don't think anything fundamentally has changed with Copart. And even if IAA has more yard capacity than it did in the past, there's a question of whether they can offer the same liquidity for car auctions, which is, again, one of the major benefits of Copart is that they have this network effect reinforcing the entire flywheel. So yeah, what really has changed? Is there any reason in particular that insurers are looking to choose IAA over Copart?

• 28:24Speaker 01

  That was basically the big question for revisiting Copart, right? Has anything changed? Is there anything that I sort of missed where Copart is vulnerable? And I gotta admit, I don't think, while there are problems, and we'll get to them, that anything major has actually changed. And even if you listen and trust Jay at air, he was quite vocal about not thinking that IAA has meaningfully improved its operations at all, which certainly is the market narrative right now. So there's primarily one insurer that has shifted its volume to IAA, and that's Progressive. So the historical split of volumes between Copart and IAA is quite uneven. So usually, an insurer is not splitting 50/50 between the two, but more like 75% of the

• 29:05Speaker 01

  volume goes to Copart and then 25% of the volume goes to IAA, just due to all the advantages of Copart that we have discussed earlier. So the reason why they split volume in the first place and they're not just giving 100% of the volume to the better operator, which is Copart, is that they don't want to create a monopoly. Because obviously, in that case, Copart would gain significant pricing power and could increase the fees for insurance companies because they couldn't shift the volume anymore. Now Progressive is going against the rest of the industry and has always leaned toward IAA. So they sent three quarters of their volume to IAA and only one quarter to Copart. And I actually even heard that they shifted as much as 90% of their volume to IAA recently.

• 29:48Speaker 01

  And the problem for Copart is that Progressive has just become the biggest US auto insurer, adding 2.5 to 3 million policies per year.

• 29:57Speaker 02

  Well, I think it's a really interesting structure you have here where basically on the supply side, the suppliers are so strong that they're able to do a degree of tacit collusion and prevent either IAA or Copart from developing monopoly. And whether they admit it or not, it's something that is seemingly being done intentionally. And I think it's also good news that it's only primarily one insurer that's supporting this IAA outperformance. But the bad news is that Copart is also unlikely to win over Progressive and Progressive is the fastest growing player in town.

• 30:35Speaker 01

  That's the problem right now. And I think you could even go a step further and say the second order effect here is that Progressive is winning share from other insurers, obviously, which are Copart customers. So Copart is basically losing volume, not only because Progressive tilts more to IAA and send more of their volume over to them, but also because that volume is coming from Copart's insurance customers. So they are losing customers to Progressive and then Progressive shifts even more of that volume to IAA. That's sort of the double whammy that Copart is experiencing there. And maybe you ask, okay, well, what's the reason for Progressive tilting towards IAA and potentially getting even more volume to them? So in the first place, what I think is that they have partnered for a very long time

• 31:17Speaker 01

  and IAA has basically provided priority services to Progressive. So they offer them faster vehicle pickup times and better storage lot placements. And it's also willing to operate, and that's the major part, at quite a low margin on the Progressive business. So it was my impression that Adair indirectly at least, mentioned that Copart simply wasn't willing to offer Progressive very similar rates compared to IAA because he didn't particularly name them. But given that they are the only lost volume and Adair mentioned that Copart chose not to do business with one party, that's sort of the takeaway that I had coming out of that call. And you can even see in the margin that the Progressive volume seems to come with quite low tax rates because Copart's auto segment has a margin of 36%.

• 32:01Speaker 01

  And if you go through the filings of Ritchie Brothers, which is the owner of IAA, they say that the auto segment is somewhere the 15 to 20% range. So significantly lower than Copart's.

• 32:13Speaker 02

  When I hear about the profit margin difference between these two companies, I think the first thing that comes to mind is that old Bezos quote about your margin is my opportunity. But if IAA is willing to accept a lower margin, then I would very much worry as a shareholder about there being a race to the bottom on pricing between Copart and IAA. And I think as Buffett and Munger would probably say, all it really takes is one ruthless competitor to ruin what is otherwise a wonderful business. And so right now, we're only talking about Progressive. But what if other insurers start switching volume over to IAA for similar reasons? Then we have a bigger problem on our hands.

• 32:54Speaker 01

  I think that's a good point. And it's actually also the one question that immediately popped up in my head when I looked at it. But after digging into IAA's filings, it looks like the majority of the margin difference is due to depreciation relative to IAA's purchase price when Ritchie Brothers, which again is the parent company, bought IAA. And then you also have Stock-based Comp and obviously, and this is coming back now, the leases that it pays for its land because again, they don't own it. And that appears to be the majority of the margin difference. So it's not that Copart is overcharging for fees. And also, as we said earlier, most of the fees are paid for on the buyer's side. So you're not necessarily overcharging the insurance companies, which is where you could lose most of your volume. So I'm not too worried that other insurers will start to choose IAA over Copart

• 33:39Speaker 01

  because of fees or price or any of that. Because again, Progressive chose IAA because they also get special treatment. And sort of by definition, IAA can't offer that to too many customers. And you still have all the other modes that we discussed earlier. I mean, they are still in place and I don't necessarily feel like they will evaporate anytime soon. So if you plan to be in business for the next 20 or 30 years, and most insurance companies do because it's a long-term business, you can still rely on Copart since, in case you didn't yet know it, they own the land. With IAA, you have the risk that they will lose land over time because permits are being revoked and land will be used in another capacity, especially when cities are getting larger and larger and you need more space for people to live.

• 34:22Speaker 01

  And also, if you trust Adair, he again, wouldn't agree with the market narrative that IAA has even become a better operator in the last couple of years. And that's very hard for me to judge from the outside because all we can do basically is just look at, hey, how many insurance companies go over from Copart to IAA? And it doesn't look like any of the ones that favored Copart in the past have done that. So right now, I still feel quite good. However, should that change and you see insurers actually changing sides? That would be not good for Copart. And also, you probably can see that before it's actually happening. And then it's also pressing to the stock.

• 34:58Speaker 02

  Did you say Copart owns the land?

• 35:02Speaker 01

  I might have.

• 35:03Speaker 02

  I haven't heard that before. Obviously, obviously kidding, no. But it's, I would think it's very reassuring that the share loss is primarily due to one customer. If I were looking at this as a shareholder and if you were seeing this coming from multiple customers, this might have been only the beginning of a long period in which Copart began to slowly lose market share. And even if they stay number one on paper, it would certainly hurt the stock because the numbers would look terrible compared to the comps. And I think what will be interesting to see is whether the insurance market actually becomes a tailwind for Copart. Again, after being a pretty strong headwind for the last few years. And just for context, as to what I'm referring to between 2022 and 2024,

• 35:44Speaker 02

  sort of COVID-related, auto insurance got brutally, brutally more expensive. And so average full coverage premiums in the US rose 46% over three years. So if you thought that you were going crazy imagining that vehicle insurance was much more expensive, you're not crazy, it absolutely is. And the reason for that was like carriers got hammered, repair costs exploded after COVID. There's lots of shortages, you had prices for used cars correspondingly explode. And then the insurance companies combined ratios, which is an important term to understand. This is just the claims plus the operating expenses of the insurance business divided by the premiums that they receive.

• 36:28Speaker 02

  And so if you didn't understand any of that, all you need to know that is for a combined ratio, if the number is over 100, that means you're losing money on the underwriting itself. And so that's not a good thing. And in response to that, so that they could underwrite profitably and have a combined ratio below 100, at least that's the hope, you saw a lot of these companies raise rates significantly to be profitable again. But in times of high inflation and a tough economy, many people just aren't willing or able to stomach those premium increases.

• 37:01Speaker 01

  Yeah, what you basically saw happening is that some people just dropped from full coverage to liability only, which basically means if they wreck their own car, no claim gets filed and no car goes to a salvage auction. And then some raised their deductible so high that basically all of these small and medium accidents never got reported. And then some just stopped insuring the car at all, even though that's technically illegal. And not only technically, it is illegal. But I mean, if you look at the numbers, about a third of American drivers were now uninsured or at least materially underinsured, if you compare that to 2023. And especially up from, you know, 2017, which is almost 10 years now, this number is up more than 10%. And CCC, which is one of the most important data companies in this field,

• 37:43Speaker 01

  found that the share of third-party claims coming in as uninsured or underinsured motorists, claims have nearly doubled in three or four years' time. So hitting 16% at the end of last year. So there are just many data points showing that significantly fewer vehicles are insured. And that's obviously a pretty bad data point for Copart. And one more that I have is that CCC also reckons about a quarter of repairs are now self-paid, meaning that the driver just fixes it themselves rather than involving the insurer. They've even launched, I've heard that just recently, a buy now, pay later product for those people, which I think whenever buy now, pay later is involved, you sort of have an idea of how big a problem got. And Copart's own data is also proving this trend.

• 38:26Speaker 01

  So there are more cars on the road this year than last year up to Copart, but insured cars have dropped about 4%. So I think those were enough data points to prove the point that this is not only a Copart problem. Even though IAA is growing, this is primarily a story of Progressive shifting over. Generally, there simply is a cyclical factor here involved where a lot fewer cars are actually on the road insured.

• 38:48Speaker 03

  Let's take a quick break and hear from today's sponsors.

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  Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally.

• 41:51Speaker 02

  All right, back to the show. You mentioned the buy now, pay later dynamic BNPL. You're making me wonder whether we should perhaps take a look at Klarna on the podcast here soon. But just staying on topic, let me ask you, are you seeing any signs of this trend that you mentioned reversing? Or is it something that will only get worse in the years to come, putting more pressure on Copart's volumes?

• 42:17Speaker 01

  It's very difficult to say when the cycle will turn, but I think there are some signs that we might see a reversal soon. So the personal auto industry ran a 95% combined ratio last year, and Progressive's own personal vehicle business is actually about eight percentage points better than the target that they publicly set in their earnings call. So you could argue that there's some ammunition to cut prices now. And by the way, regarding Progressive, I should add, I don't see the trend of them winning more and more customers as a long-term threat, because insurance is a highly competitive field, which is also why you see these combined ratios sooner or later go back and closer to 100. And if they outperform a couple of years, that's already a pretty good performance. Usually, that's very unlikely to continue.

• 42:59Speaker 01

  So basically, I would expect that by now, even though it can still take a couple of quarters, perhaps even years, you will see a shift and perhaps these insurance rates become a tailwind for Copart. And you should also see that Progressive is not winning more and more market share from the competition, at least not in the long run. And then, as we see bigger market shifts with lower insurance rates, we might also see a shift in who wins more customers in that new environment. And I don't have a guess on which company that will be, but I'm quite confident most likely it will be a Copart customer. Generally, though, even with first signs of a less hot insurance market, it will probably need a couple of quarters at least before you see a meaningful impact in the numbers. After all, the rates are still 50-plus percent higher than just a couple of years ago.

• 43:44Speaker 02

  All right, then. We alluded to it earlier, just to kind of teased it. And it's the elephant in the room, but why don't we discuss the CEO transition a bit? And I gotta say, it did come as a real surprise to me. Copart has this history of very long CEO tenures. For anybody who's a fan of the NFL, it's sort of like the Pittsburgh Steelers. They keep their coaches around for a long, long time. So it was a real shock when they fired Mike Tomlin this year. But after Willis Johnson, the founder, served as CEO for almost 30 years, you had Jay Adair take over and then run the company for 14 years. And he's somebody who had been with Copart doing other positions since 1989.

• 44:26Speaker 02

  So pretty long connection to Copart, plenty of experience. And then you had Jeff Liao, who took over in 2022 after serving as co-CEO with Jay for two years. And now, just four years later, Jay Adair will take over again, and Liao will step down. And as far as I know, Jeff will not even be a part of the board anymore. So he'll have something of a role, like a special advisor. But I'm not really sure what that means. It might just be something to kind of placate him.

• 44:55Speaker 01

  I wasn't quite sure what your NFL reference means, but you know, just for the people who know the Bundesliga, the equivalent would be SC Freiburg, who also likes to have coaches on for a very long time. But getting to Copart CEOs, it is a bit difficult to figure out how exactly that decision has been made. I mean, Jay Adair scheduled a call, and this is basically the call I'm referring to throughout this recording, today, between the Q3 earnings call and last week's Q4 earnings call. And they never did this in the three decades of being a public company. And by the way, we record this just before September 3rd. So the Q4 earnings call that I just said, last week's earnings call, we actually haven't yet listened to it. And if anything massive should happen, you gotta check out our free newsletter, which

• 45:40Speaker 01

  I will link to in the show notes, because over there, we will have all the new information and updates included, so you don't miss anything. Anyway, on that call, Jay Adair basically made sure to say that he and Jeff agreed on the decision that they are still friends and they live on the same street and all of that stuff. But while that's all true, probably, fact of the matter is that I don't think Jeff would have stepped down if things had gone great. And I also think that Jay Adair and Willis Johnson thought the company has been mismanaged to some extent. And Jay is the one who could turn it around. Otherwise, why don't you have both people on the call? I think that would have helped to some extent. It also sounded like Jay Adair thought there's some stuff that needs fixing at the company.

• 46:19Speaker 02

  I would say it's pretty awkward if they actually literally live on the same street. That would be a bit of a weird vibe. But yeah, the market dropped 8% when the news came out, and that is kind of surprising since Jay took the company from a market cap of $2 billion to $30 billion. So you would think that there should be more excitement about this veteran CEO and company builder coming back. And especially since he also said he will not be a transitionary CEO. He's planning to stay for a decade or even longer.

• 46:51Speaker 01

  I believe it was more about the fact that this transition felt like an admission that things were not going that well at the company. And that doesn't help, obviously, when the sentiment is bad anyway. And again, when we cover the company, it was already down like 30% back when, you know, this decision has been made, the stock was down even further, and the sentiment was even worse. And by now, I should say, the stock has recovered quite significantly. It's up about 25% from its lows. And also, when the news first dropped and the market reacted, it wasn't immediately clear whether Jay Adair would actually stay on for the long term or basically would just, you know, be a transitional CEO, which definitely wouldn't have been a great sign, because then you would need to look for a new CEO. It would even more be a sign of we didn't trust Jeff Liao and what he did with the company. Now that's a bit different.

• 47:35Speaker 01

  And you know, Adair has also been quite clear, again, that he thinks the current narrative on Copart is just wrong. And he pushed very hardly back against the idea that some customers are unhappy with Copart or likely to switch to competitors. And it was also during that call that he mentioned that spending on yards is no longer necessary to, you know, at least the same extent. So I think there's a lot of stuff that we will see in the future. It wasn't too clear about what that will actually be.

• 48:03Speaker 02

  I'm really curious, did Adair say anything more about what capital allocation will look like going forward? And the reason I ask is because one of the most important changes since the last time we looked at Copart is that they started buying back stock massively. And that could be a really positive signal, especially given their fantastic track record with doing buybacks very, very well in a way that's accretive to shareholders. And so after actually having five straight years of no buybacks, Copart has initiated the biggest buyback program that it's ever done, at least in absolute dollar terms. And so Copart bought back more than $1.6 billion of stock in the last two quarters, with more than $1.4 billion of that coming in the last quarter at what seems like fairly

• 48:48Speaker 02

  rock-bottom prices. So basically, what management is telling you is that they think that this stock is fabulously cheap.

• 48:55Speaker 01

  We use Copart as an example for how to make buybacks. But many of the presentations that we had in our community and also at events. So finally, they started buying again, which probably, especially for this company, is a very good signal that the stock is most likely undervalued. And as you said, the last really meaningful buyback happened 15 years ago. So for the longest time, they thought the stock likely is overvalued, at least compared to where they otherwise could invest that capital, which again, to some extent, has been in yards, for example. So I think generally, to me, Copart is very much a story of trusting the management team, both in capital allocation and also in making the right decisions to position Copart for

• 49:38Speaker 01

  a future of EVs, AVs, and, you know, international expansion. And I can already spoil, we'll not talk too much about AVs today, but we talked a lot about it in our first episode. And I think our take on that hasn't really changed. I think the risks are the same, the timeline is the same. So if you want to know our opinion on that topic, I would say you should listen to the first episode. Speaking of which, another change in the management team is that Jen Pokak has been promoted to President of the company, and she ran Copart's UK business previously, which is the largest and the most established international market. And I think this is just another pointer to the importance of the international expansion. So if you ask me, where will they invest most of their money in the future?

• 50:22Speaker 01

  I think a significant chunk will likely go to the international business.

• 50:27Speaker 02

  Speaking of growth opportunities for Copart, with Adair coming back, what strategic shifts should we expect now? I mean, you just mentioned the international business. So I suspect that that will become an increasingly important focus for him and the management team as a whole.

• 50:41Speaker 01

  It seems that there are three pillars that ADEA wants to focus on besides a general reversion to the mean in the core insurance volume. So the first is the often discussed, as you just mentioned, international business. Again, international revenue is up 14% year over year. Service revenue grew especially rapidly and the international operating margin, and this is sort of the most important point, increased two and a half to three percentage points last year. And that happened for quite a long while right now. So Jay Adair really pointed out that the breakthrough in Germany makes them confident that they can now use that as a blueprint to go into other markets and sort of initiate the service model there. Again, currently the revenue there is up 18% total. So if we assume it can grow 15%

• 51:24Speaker 01

  per year on average, that contributes a bit under three percentage points to consolidated corporate growth and a bit more than that to the bottom line because of, you know, the margin expansion that we see. A second growth engine is what happens in the non-insurance business. So Copart has, as we talked about last time, what is called BlueCar, which is for fleet and commercial accounts, which basically provides tailored services such as as the recovery arbitration and condition reporting. And then they also have what's called CashForCars.com, which is just for buying cars directly from the public. And this used to be a growth driver, but it has slowed down recently and ADEA didn't give much insight into why that has been the case. But he did say that the whole car business

• 52:05Speaker 01

  will look, quote, "very different in three to four quarters." Again, it's kind of vague, but you know, at least he gives the impression of knowing what to do and how to handle growth in the future. Another thing that we also talked about last time is what they have called Purple Wave, which is an online auction site for heavy equipment, agriculture, construction vehicles, those sort of stuff. They actually acquired it a while ago. And then NPA, which is short for Natural Power Spot Auctions, which is doing the same. So we're talking auctions again for motorbikes, watersport vehicles like jet skis or something like that, and even snowmobiles and RVs and golf carts. So all sorts of special things that

• 52:45Speaker 01

  I think we mentioned last time would definitely not be replaced by EVs anytime soon. And then the last growth pillar would be what they call technology services. So Copart basically operates what it calls Title Express, and that's a product for getting the vehicle title released from the bank or the owner, then paying off the outstanding loan. And that's part of a business model that sits somewhere between the insurance and the whole car business.

• 53:10Speaker 02

  So do you have any idea why he would say that the whole car business could look materially different in a couple of quarters? I mean, do you think they're planning an acquisition or something similar?

• 53:21Speaker 01

  I think the honest answer would be, I'm not sure. I think there's a cyclical element to the weakness in the sector, which is mainly the supply of at least quality three-year-old lease returns is at its lowest in over a decade because, you know, similar to what we said earlier in terms of the pandemic, barely any new cars got built during the chip shortage that we saw in 2021 and 2022. And that should take care of itself over time. So I think that's part of it. And then I'm not sure what Copart plans are directly, but perhaps we could see a spinoff or something similar because it appears that Copart just doesn't have the same sort of mode and reputation in the whole cars as it has in the core salvage business. Because again, in your own salvage, you're up against IA and they win on land,

• 54:04Speaker 01

  they win on liquidity, and they also win on the international buyer base. But then when it comes to the whole car business, that's just a completely different competitive set. So you're up against, you know, Monheim, which is a company that we also used for some data last time, and just many of these physical auction networks that are in the business for decades that people know when they actually want to buy a good car which is not wrecked, which is usually what you get on Copart. So I don't know, I could imagine some more structural change to the company. I think some quarters ago, when a call Jeff Liao, who was back then still CEO, was asked whether the brand would need to be a different one since, again, Copart is not well-known to consumers. And if so, they're again primarily known for wrecked and damaged cars. And he said that, you know, perhaps they would need

• 54:47Speaker 01

  a sort of rebrand and it could be again a spinoff, but that's just pure speculation on my end.

• 54:52Speaker 02

  So what's the deal with Purple Wave and National Power Sports Auctions, NPA? Did they also get dragged down by this pretty tough market environment? Or are they performing well?

• 55:03Speaker 01

  Unfortunately, Copart doesn't disclose specific numbers for them, but they did mention that they expanded the sales force for Purple Wave specifically and made sort of a strategic decision to expand the business coast to coast, prioritizing the highest GMV market. So I just assume this means the business is doing well, or at least they're believing in the future of the business. But it doesn't appear to be a core focus either because ADEA, again, as publicly said on the call, he didn't yet spend much time on that business and he would focus on the core insurance business first, and then over time go to, you know, Purple Wave, NPA, and those sorts of things.

• 55:36Speaker 02

  I've been thinking about Copart a lot, and there's something else I wanted to ask you about. And that is that just a couple of days ago, there was a rumor spreading that Copart is perhaps interested in buying CCC Intelligent Solutions. And admittedly, it's a company I know very little about, but it sounds like perhaps it could help with the data aspect of Copart's business. And so the deal might be related to one of these vague comments that ADEA made in his July call with investors.

• 56:04Speaker 01

  It's actually a good point. It might be one of those, although we should say that at the time of this recording at least, the potential acquisition is just a rumor. I think what started because Bloomberg reported that Copart is in talks with CCC, but they're not the only bidder. They are basically up against a couple of private equity firms, including GTCR and Veritas Capital. And Copart's management doesn't strike me as the sort of people who would overpay for such a deal, which they might need to if PE firms are already in competition. But getting to CCC and what they actually do, I've actually indirectly mentioned them today a couple of times. I don't know if you realize that, but many of the data points, I said it here, came from CCC. So basically, it's a company that was founded in 1980 in Chicago. And yet they built a software layer that sits

• 56:46Speaker 01

  between everyone involved after a car accident. So if you crash your car in the US primarily, there's a very high chance that the estimate determining whether it gets repaired or written off is generated in CCC's software. And they serve something like 300 insurance companies, including 27 of the top 30. So basically, all of the big insurance companies are their customers. And then they have something like 30K repair shops, thousands of parts suppliers, plus, you know, the car manufacturers. And they've got a huge data library of, you know, I read more than 300 million historical claims, which is what makes the damage estimates so accurate and also the data so important for companies like Copart, for example.

• 57:27Speaker 02

  To recap, Copart's core business is clearly dependent on insurers deciding to total cars rather than repair them. But then now you have Copart wanting to buy the company that essentially helps insurers to decide whether a car is totaled or not.

• 57:46Speaker 01

  Yeah, that's basically it. Yeah.

• 57:48Speaker 02

  I gotta say, it's a bit, it sounds a little shady, if you ask me. I mean, it feels like a pretty flagrant conflict of interest. I assume Copart wouldn't intentionally or blatantly influence the algorithm to push CCC to label more cars as being totaled, even though that would be good for their business because that sounds very illegal and would destroy CCC's neutrality and credibility and thereby really its entire product. But again, it feels like something that would be at a minimum flagged by regulators. And call me a pessimist, but if this sort of collusion or market manipulation is not possible or not what Copart wants to achieve, then my question for you is what exactly do they want to gain by buying CCC?

• 58:31Speaker 01

  Yeah, I think I should preface that everything I say now, it's just an opinion that I sort of have, you know, formed on short notice because the news more or less just dropped and I haven't yet had a chance to actually deeply research what CCC does and what the potential synergies were, if something like that deal would actually happen. But I do see many possible advantages for Copart that have nothing or at least very little to do with changing the algorithms. I think the first one would obviously be faster cycle time because days in the yards is one of the most important metrics for companies like Copart and IA. And those could obviously be reduced when CCC's total loss trigger directly wires cars to Copart's dispatch.

• 59:12Speaker 02

  Maybe I was being a little too cynical, but talking about data, as you mentioned, CCC has millions of historical claims and Copart has the actual auction outcomes for millions of those cars. And so I can see why combined, that would be maybe the best business model that they could build for predicting what a damaged car will fetch. And given that higher auction returns make totaling more attractive, a more accurate model surfaces more total losses. I do see your point on, on how it can fit into the existing Copart flywheel.

• 59:48Speaker 01

  And even if we would assume that some of these things wouldn't be possible, given regulatory concerns, I mean, you would still get a business that has about a billion dollars in revenue, 96% recurring subscriptions, low teen cash flow margins, which, you know, at that point they are adjusted for SBC. And I think they have some potential of seeing higher margins in the future. And it will also serve as a sort of natural hedge because it works the exact other way than Copart. So if total loss frequency, for example, keeps climbing, Copart wins and CCC's repair volume shrinks. But if that reverses, then you have CCC's repair business boom and Copart's supply tightening. So obviously, since Copart would be the much larger part of the business, it's a small hedge, but at least the sort

• 1:00:31Speaker 01

  of dynamic where you could see some sort of advantage from that acquisition. But of course, you would need to get it at the right price for it to make any sense. And again, that might be difficult since PE firms are already involved in the bidding process. And I think currently CCC's stock is down about 27, so close to 30% over the past year, and price to operating cash flow has declined from over 30 to about 10x. And the reason it is that cheap is, well, we talk about it so often, the top line growth has slowed to around 10%. It was a faster grower before that. And obviously, I don't need to tell you about it, the market is a bit nervous right now, if you haven't yet noticed, about AI displacing software generally.

• 1:01:11Speaker 02

  Might be the understatement of the year. What would make this remarkable either way is that this would be by far the biggest deal Copart has ever done. For context, the Purple Wave deal was in the $100 million range. And for NPA, that motorbike auction business, that was estimated to be around in that same range as well. So this would be a minimum of a four and a half billion dollar deal, which is essentially Copart's entire cash pile, although I'm sure they would raise some debt for the acquisition instead of burning all their cash. Point being, this is very substantial.

• 1:01:44Speaker 01

  Yeah. And historically, Copart is not the type of company that likes to raise debt. But obviously, in this case, they would need to because you would definitely not burn through all of your cash pile just to make an acquisition. And also, referencing the ADEA call one last time, he did mention on that call that if the right opportunity comes up, he would also raise debt. So he would be open to it. And, you know, it's just speculation, but perhaps he had his mind on CCC when he said that back then.

• 1:02:10Speaker 02

  Well, it's that fun part of the episode where I think we should transition to the valuation section. And I'm actually, I'm really curious about this one because as mentioned earlier, we briefly owned Copart before. So we're both fans of the business long-term and with the price being even lower than it was last year, I wouldn't be too surprised if you ended up recommending buying it again and maybe this time for the long haul. So with all that said, I also remember that we primarily bought the business due to our perception of the company's quality and the expected return though just barely met the 12% target that we have or hurdle rate in your model last time. So has anything changed now? Do

• 1:02:52Speaker 02

  you feel like buying the stock at these prices is more likely to deliver a return that clears our hurdle rate?

• 1:03:00Speaker 01

  Well, in this case, we're clear enough to say that it was not only the price that went down, but the fundamentals were unchanged, but you actually had revenue growth come down significantly and the price adjusted, right? So it's not the same as, for example, Google last year where the fundamentals are the same, the multiple drops and therefore the stock gets more attractive. In this case, the stock might look more attractive because it's cheaper than a year ago. If you just look at how much share costs, but growth also slowed down. So it's a bit different than, for example, the Google situation. So if I updated the DCF model than I did, the result is not totally convincing, I gotta say. I mean, a total revenue growth of about 5% to 6%, which is low compared to the history, but it's also close to none right now. An EPS growth of 9% thanks to some buybacks

• 1:03:45Speaker 01

  and then some slight margin expansion, which Copart has seen basically throughout the last two or three decades. Then the expected return would be about 10% from today's prices, assuming an exit multiple of 20, which again, if you would just look at the history, it might seem cheap, but I do think the stock has been repriced and to some extent, we won't see multiples of 40 or 50x again. I think that's kind of unlikely. However, this time I also did a reverse DCF and in a reverse DCF, you basically, oh, you do the DCF backward? I would say that's the easy description of what you're doing. So the idea is that you assume today's price is exactly right and then you solve for the growth rate of the business. So essentially the growth rate that the market currently expects Copa to

• 1:04:28Speaker 01

  achieve based on the price that the market values the business at today. Now, given that my growth rate assumption in the normal DCF has been in the mid-single digits and the results have been that the stock is more or less fairly priced today, it shouldn't come as a major surprise that the growth rate the market currently expects for a higher single digit to low and double digit return based on the reverse DCF is about 5%.

• 1:04:52Speaker 02

  Just to give folks a little easy summary, I think it would be that at a mid-single-digit growth rate over the next five years, you could probably expect an 8% to 10% return complemented by buybacks and things like that. And should Copart return to double-digit top line growth, you would probably see a very compelling return in the mid to high teens on an annualized basis. And so if Copart basically stays at current growth rates, returns will be probably in line with the market, nothing special, which is really what we mean when we say that a stock is fairly valued.

• 1:05:27Speaker 01

  And a current growth rates, which are close to nothing, basically, obviously you would massively underperform the market in the next couple of years. But yeah, I think that's what it currently looks like. And usually what we do is we sort of have a different likelihood assessed to a certain outcome. So you know, a bear, a base and a bull case. In this case, I think the likelihood of them actually achieving and going back to these double-digit growth rates is kind of high. So I'd probably say there's, you know, a 40% likelihood that happens than the base case, which would be mid-single-digit return is also 40% and then you have a 20% likelihood of them actually staying in this 0% to 3% growth rate. So I think it likely is a pretty good opportunity for people who very much like the business, always wanted to own it and sort of feel like now is a good opportunity

• 1:06:10Speaker 01

  because we are at these cyclical lows. Personally, I'm not quite there yet. I don't feel like Copart is, you know, the opportunity that now stands out to me when I look at the rest of our portfolio, where I immediately feel like we gotta sell, you know, one of the companies, then make it happen and buy Copart. Because one of my major takeaways from, for example, the Biggest Loser episode, is that we did not do too well on businesses where the revenue is declining, or at least the growth rate of the revenue is declining. And what I believe, I do understand the reasons for Copart. We just saw the management raising some yellow flags with, you know, the sudden CEO change and then some more or less vague statements on what Jay Adair, the new CEO, will change about the business. And we sort of saw that, you know, we saw it with companies like Lulu, we saw it with PayPal, we saw

• 1:06:55Speaker 01

  it to some extent, although it's different with Adobe, and it just sort of stops me from, you know, really being excited about the opportunity right now. And again, if you put me on the spot, then I would say Copart will be a good investment going forward, but perhaps not in the next couple of months, but once the cycle turns and obviously we want to invest for the long term. But if I look at our portfolio, I just don't see a company that I would want to sell right now in order to buy Copart. And we only have about 2% cash left, actually a bit less than that. So basically what we would need to do is sell one company and then buy Copart forward. And that's my take. How do you see it? Is there any company you would feel like, I gotta own Copa, so I gotta sell company X here?

• 1:07:33Speaker 02

  I don't necessarily think so. I think we're probably both a bit traumatized from our experiences looking at the Biggest Losers in that episode. And we'll, we'll link to that in the show notes in case you missed it. We have definitely come to appreciate how strong of a force downward momentum can be. Stocks almost always can fall further than you think possible, even when you model out these, what you think are very conservative bear cases. And so that's, that's just the reality, especially in the short term. And because a stock falls to a point far below what anyone thought was possible, that's actually where you get the last sellers of the stock capitulating and then the shares can finally take off rallying again. So it is sort of an inevitable process to have

• 1:08:15Speaker 02

  this pendulum swinging in finance. There's a lot of it, but I really like Copart because it's just such a perfect epitome of why you'll hear people say that you should invest in boring businesses. And unfortunately, that heuristic is too simplified, but Copart's business is very intuitive and boring in the sense that it's not going anywhere, even though we didn't even really discuss AVs today, which does promise to at least fundamentally change how we drive. And we don't really yet know how that'll affect the business, but whether human driven or automated, I am sure that in the US in particular, there are vast highway system, cars are not going anywhere in our lifetimes. And if anything,

• 1:08:56Speaker 02

  AVs could lead to a proliferation of driving and therefore business for Copart, especially with the assumption that by baking in even more technology into cars to make them autonomous, totaling them becomes easier. So I would say that's probably my bull case on Copart. But again, with 20x earnings, with decelerating growth, a CEO swap out, some of this fundamental uncertainty about autonomous vehicles, I would just agree that the stock is not obviously cheap, even though the price has come down a lot, which is counterintuitive to some people, but that's just the reality of how intrinsic value works. And so if we wait, we may very well be able to pick up shares at a bargain bin price and spare ourselves some of the roller coaster ride. And if we don't get the chance to do so, I'm perfectly

• 1:09:41Speaker 02

  fine with that, too. I think we own a lot of other great businesses.

• 1:09:44Speaker 01

  I think the last point is what it comes down to me to, where basically I would say, is this a company that I need to own at some point? And if it would be, I think it's at a great price right now to say, okay, well, maybe it gets a bit cheaper, but if I definitely want to own this business, I should, you know, use the opportunity right now to buy it and then potentially buy more when it comes down further. I think I really enjoy looking into Copart. I like the business. I like that it's one of the most multi-businesses that we looked at here on the show. And yet, as I said before, it doesn't excite me so much that I want to buy it necessarily. And that's not because it's a boring business. I think boring business is generally a great opportunity, but I think it needs to be cheaper. I think what you mentioned in terms of, you know, when the last person is selling stock, that's when you want to buy a company that you're not too sure of. I mean, you know,

• 1:10:28Speaker 01

  one of the things we discussed with our Biggest Losers is that basically when we sold PayPal, we were the last hand that sold the stock. And since then it went up, you know, 50%, 60%, but I think that's not the case where we are currently with Copart. I think there are still enough people who are bullish on the company so that this might not be the bottom. Again, if you want to buy the company, I think it is at a cyclical low and I think it could be interesting. But for the two of us, considering the companies we already have in the intrinsic value portfolio, I think we're going to pass for now. And should the stock decline even further, I think that would be a bit of a different scenario. Also, I should say, you know, I mentioned in the podcast here, the stock is already up 25%, so we're not at the bottom anymore, where I think it would have been even more attractive

• 1:11:11Speaker 01

  than it is today. Anyway, with all of that said, let me close it for today with a quote by none other than the Copart founder, Willis Johnson himself. And he said, quote, "As long as we have got the land in the right place to put the cars on, we can't fail." So I said it, you know, oftentimes today, we can't stop talking about the mode that the yards have been, but even Willis Johnson can't stop talking about it. So we're probably right to do that. And with all that said, I hope you had a great time listening to this episode and see you all in the next one.

• 1:11:43Speaker 00

  Thanks for listening to TIP. Follow the Investors Podcast on your favorite podcast app and visit theinvestorspodcast.com for show notes and educational resources. This podcast is for informational and entertainment purposes only and does not provide financial, investment, tax, or legal advice. The content is impersonal and does not consider your objectives, financial situation, or needs. Investing involves risk, including possible loss of principal, and past performance is not a guarantee of future results. Listeners should do their own research and consult a qualified professional before making any financial decisions. Nothing on this show is a recommendation or solicitation to buy or sell any security or other financial product. Hosts, guests, and the Investors Podcast Network may hold positions in securities discussed and may change those positions

• 1:12:26Speaker 00

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