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- [00:00]
Ryan Henderson
For the past three years, IBKR individual clients averaged 24.3% annually, beating the S&P 500's 23.1%. Lower costs and 170 plus global markets matter. Interactive Brokers Member SIPC Visit ibkr.com performance. Welcome to Chit Chat Stocks.
- [00:26]
Brett Shafer
On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is
- [00:34]
Ryan Henderson
a CCM Media Group podcast.
- [00:36]
Brett Shafer
Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is
- [00:41]
Ryan Henderson
not formal advice or recommendation.
- [00:43]
Brett Shafer
Now please enjoy this episode. Welcome into the Chit Chat Stocks Podcast, a podcast to help you find your next great investment. My name is Brett Schaefer and I am joined by my co host Ryan Henderson. Today on our Wednesday episode, we are bringing you another Ryan Research episode and we are discussing Copart, a potential fallen angel. And we wanted to discuss this company because I believe it was on the Power Hour, one of the nice spots Spotify. Our YouTube comments we get. We were told that we misunderstand Copart because we made a offhand comment on the Power Hour. So we wanted to fix that and do some real due diligence on this stock. Well, at least Ryan did. I'm going to ask him questions about the business. But before we get started, remember to give us a review on Spotify, Apple Podcast or subscribe on YouTube so you never miss an episode and subscribe to the newsletter to join our podcast chat community and get more stock analysis. The link for that is in the show notes Ryan, let's get into Copart. You have a quote from here from a hedge fund, I believe, and that's going to lead right into it.
- [02:00]
Ryan Henderson
Yeah. So whether or not you're familiar with Copart, the stock is down, I believe, fif more than 50% from highs. And that's part of what inspired me to research this. And as I was looking into Copart, I found this write up from Srikanth Viswanathan. Apologies if I'm pronouncing that wrong, but it was his. SVN Capital is his fund. I've actually interviewed him a while back, I can't remember where, but in his 2025 investor letter he wrote about Copart and he's been a longtime shareholder. He says my long term optimism is unchanged. Copart still enjoys a wide moat built on its real estate footprint. Nearly 19,000 acres of owned or controlled land, its dense buyer seller Network, more than 750,000 members across 170 countries, and its proprietary auction technology called VB3, all supported by a fortress balance sheet with no net debt management and directors own meaningful stock and have a long history of rational capital allocation including an open ended share repurchase authorization. It's a good summary for what we're about to discuss. We're going to get into the actual business model. I think that will be the bulk of the show today because it's not that intuitive. But I'll leave it there. I guess I'll maybe ask you a question, Brett. How much did you know about Copart prior to doing this episode?
- [03:24]
Brett Shafer
I knew that they owned the land because that's what everyone quips and says in their 30 second elevator pitch and that gives them the advantage. I know that they have some sort of junkyards or they have a better business term for that which you get into that. I thought it was funny reading your notes and that it. I guess the analogy I had in my head is it's similar to waste management or airports where in a metro area citizens don't want a million of these. And the scarcity gives you kind of an advantage. And that's. That's all I know. Yeah.
- [03:57]
Ryan Henderson
And Copart, the founder, Willis Johnson, we'll get into this history throughout the show, but he wrote a book, I believe it's called Junk to Gold is the title. Maybe you can fact check me there, Brett, on basically how he built the business. And I have found that typically when a founder writes a book about how they built a business, it tends to lead to more investor enthusiasm. Which I think is why Copart has sort of been a value investor darling. That plus exceptional returns for the better part of 20 years. But before we dive into the business, how I got interested in this to begin with is it's a fallen angel. This was one, I just mentioned it. A lot of value investors loved. It has long time been lauded as one of those great long term compounders that dominates an industry everyone else overlooks. And it's kind of one of those business models you don't really think about or maybe you don't even know exists. But investors loved it for good reason. And they were rewarded with a consistently above market multiple. Since the 1994 IPO, they have generated more than an 18,000% total return. And that is after this recent drawdown, getting cut in half. So that comes out to more than a 17% annual return. Spectacular results if you've owned shares over that time. But as with seemingly every non AI infrastructure stock at the time, at this time, shares of Copart have plummeted over the last couple years. Shares are now down 56% from highs. Largest drawdown in more than 20 years. I admit I'm somewhat new to Copart. I know there's shareholders that have been in this one for quite a while. I didn't start by reading the book first. I started because it looks really cheap and it's got some fantastic fundamentals.
- [05:55]
Brett Shafer
And the, the name of the book is Junk to Gold, as you mentioned, Ryan. So anyone that wants to look that up, I'm sure it's quite good. A lot of people have recommended it. And who knows, maybe Copart can be an AI stock. If Caterpillar is going up 5x as an AI stock, who knows, maybe Copart in the future could be as well.
- [06:15]
Ryan Henderson
I don't see it yet, but maybe there's a world in which it's possible.
- [06:19]
Brett Shafer
Yeah, we will see. We will see. All right, let's get on to the next topic here. Where does Copart fit in the auto industry? Talk about their customers, suppliers, where they fit in this ecosystem and how the business model essentially works from customer to sale, buying and selling used or not used vehicles. Total vehicles.
- [06:37]
Ryan Henderson
Yeah, I'm going to spend some time on this part because I don't think it's a business model that people are that familiar with. So the easiest way to explain the business is to give an example of a typical transaction. So imagine you're driving and you get in an accident. Let's assume you're insured. And just for example purposes, let's assume you're fine, you're able to walk away, you're okay, but your car took some pretty serious damage. What would happen after that? Well, first of all, be safe, pull off the road, call the police. But the next thing you'll want to do is, is take pictures of everything and file an insurance claim. Your insurance company will then arrange to tow the car to an improved collision repair shop or temporary storage lot. Usually while it's in that shop or storage lot, the insurer will have an adjuster look at the damage and determine the repair costs relative to the value right before the accident. So repair costs versus the pre accident value of the car. If the repair costs would would be too high, usually it's about 70 to 80% of the vehicle value. If it's above that threshold, the insurance company will declare the car totaled or a total loss. That's where Copart comes in. Once the car is declared a total loss, the insurance company will assign the vehicle to a salvage yard. There are pretty much two companies In America that own and operate salvage yards. There are more. But 80% of the market is made up of these two companies. It's IAA Insurance, Auto Auctions, and Copart. The two of them count for 80% of all salvage yards in America. Let's assume for this example, that they decide to assign the vehicle to a Copart salvage yard, which, Copart is the leader here in terms of market share. Copart would then dispatch one of their tow trucks to move the vehicle from that temporary lot to. To the salvage yard or the junkyard. They, they use some other terminology for it called, I think, vehicle remarketing services, as opposed to salvage yards, which maybe makes it sound a little bit better. But anyways, during this process. So just to rewind here, you got an accident. Insurance sends a tow truck, Tow truck takes it to a temporary lot. They determine that it's totaled. Copart goes and picks it up and brings it to their lot. During that process, you, the driver, would get paid out whatever the insurance company deems as your actual cash value minus your collision deductible. And you would then sign the vehicle title over to the insurance company. This is important. The insurance company owns the car at that point. Now, once the car is on Copart's lot, Copart will do a little bit of light cleaning of the vehicle, make it look slightly nicer, and it'll take, I think, like 10 photos of the. Of the vehicle. They will then list the vehicle details and the pictures on their website@copart.com you can go, you can look it up. I mean, you or me, Brett, could go and buy one of these vehicles if we felt so inclined.
- [09:50]
Brett Shafer
Yeah. Value a little value investment there.
- [09:54]
Ryan Henderson
Yeah.
- [09:55]
Brett Shafer
Buy one of these. I don't think that's our expertise.
- [09:57]
Ryan Henderson
No. I think unless you're a mechanic or a part shop or something like that, it doesn't make much sense to be a buyer. But who knows? Once it's on Copart.com, they conduct an online auction for the car. There will be a bunch of potential buyers bidding on that vehicle. So I've got a picture here of Copart.com, i can already see whatever 10 vehicles. You know, maybe they look out, look okay on the surface, but there's something wrong. Some of them are totally damaged, but maybe there's something wrong and it's total on the inside. The buyers, which typically include dismantlers, rebuilders, scrap dealers, and often it's international buyers, too, by the way. So, like, if, if I am in Brazil and my labor is much cheaper to reservice a vehicle and I can sell it for more elsewhere. All of a sudden you're not. You potentially have higher margin than a US scrap shop, if that makes sense. Does that kind of geography arbitrage make sense?
- [11:04]
Brett Shafer
Yeah, I mean, especially if there's, you know, import restrictions for new vehicles in certain markets. Yeah, it can, can add help there. And especially in areas with lower income per capita. I think it makes sense.
- [11:17]
Ryan Henderson
Yeah. Once someone has. And I guess I should also mention, because there are so many buyers, because Copart is the leading total vehicle auctioneer marketplace, they tend to get the best price. Their vehicle sales price is higher than you'll see on IAA or any other service. So. And that not only benefits Copart, but it also benefits the insurance companies, because keep in mind, the insurance companies still own the vehicle. So once someone's won the auction, the buyer will send a tow truck to the Copart yard and pick it up. Keep in mind, vehicle still belongs to the insurance company. Copart is just the broker. So Copart gets paid primarily in two ways. One, they get paid by the insurance company. Usually this is a fixed fee for picking up the vehicle, cleaning it, listing it just, you know, it's not that meaningful. But it'll sometimes account to, for 1 to 2% of the vehicle's overall sales price on average. Two, they charge the buyer a commission. So when they buy, like let's say that scrapyard or the dismantler buys a vehicle, usually depending on the vehicle's price, 10 to 15% of that vehicle price will get paid out to Copart. And again, there's kind of different tier structures depending on the customer you are. Depending on the average, you know, cost, depending on how much vehicles you're buying, maybe you're buying volume, like a whole fleet or something. Those sales commissions account for 85% of Copart's revenue. So that's the bulk of the business is commissions from the buyers. Copart is for all intents and purposes, a broker between insurance companies and dismantlers, rebuilders, scrap yards.
- [13:10]
Brett Shafer
So you may have or may not have mentioned the land advantage yet, but are they actually holding the cars on the balance sheet or is this part of the capital light model we discussed pre episode where they don't have to have this as inventory or does it cycle through quickly? How does that work?
- [13:26]
Ryan Henderson
They hold the cars on their land, but they don't purchase the cars at any point. Remember, the insurance company still owns it, so the car is not on. Maybe there's certain cases where they pick it up, but for the most part it's an insurance company that still owns the car. So the cars are not on the balance sheet. No, but the land, they. They own the land. And there's probably some maintenance capex that's required for the land. But at the end of the day, these are largely just big massive dirt or paved lots with a bunch of cars on them. And you can look up pictures online. There's tons of Copart yards. It's. It's usually just massive junkyards. Is.
- [14:10]
Brett Shafer
That's different, right? That's a different. This. There are sort of junkyards.
- [14:14]
Ryan Henderson
It's really not junkyard. It's. These are. When I think junkyard, I think parts. These are complete vehicles. It's a full lot of vehicles where maybe the engine's busted, maybe something's wrong with the exterior, maybe there's been terrible hail damage and it's going to cost so much that it's just been deemed totaled. So just think basically owned parking lots that they are storing vehicles on behalf of insurance companies and they're selling them in the process. Their goal is to get. Find a buyer as soon as they can so they can turn. Turn them over more and more.
- [14:53]
Brett Shafer
Yeah, I'm looking at the locations in our hometown of Seattle, and both locations in the north and south side are well outside of the metro area. So these aren't going to be in the middle of city centers, obviously, but they're even going to be well outside of kind of the suburb limit. Kind of look at a typical United States city. Let's move on to the next section though. What does the competition look like? Who is iaa? Take us through how this turned into a nice duopoly industry.
- [15:25]
Ryan Henderson
The junkyard or salvage yard market, which the participants called the vehicle remarketing industry, is dominated almost entirely by two companies, Copart and iaa. I kind of mentioned this earlier. Unlike Copart though, which was basically built from the ground up, one salvage yard at a time by Willis Johnson. And we can talk more on the history in a sec. IAA was founded as a roll up of a bunch of different smaller salvage yards in 1982, which is actually the same year that Copart was founded, kind of funny enough, but since then IAA has kind of been tossed around. They went public in 1991, so rolled up in 82, public in 91, taken private in 2005, went public again in 2019, and then was acquired by Richie Bros. For $7.3 billion in 2023. So it is now a part of RB Global, which is a public company. They are an auctioneering business. And I think the majority of the business, I believe, is IAA at this point. That focuses on vehicles and other heavy equipment too. So I think they seem like sort of a natural fit here as an acquirer. We can actually compare the two companies fairly closely because they're both publicly traded and there is some segment level data that RB Global spits out. But right now Copart is still larger. They process about 4 million, 4 million vehicles annually, or 50% of the market share, while IAA processes 2 1/2 million vehicles, about 35% market share. So Copart is the largest. But IAA has actually been gaining share over the last five years. That's the big reason why we've seen Copart's drawdown. For the most part, I think IAA is gaining share. For 40 years, Copart was the sharetaker. So it feels like maybe the thesis is breaking and I think people are worried about that. But before we talk sort of what's happening lately, I want to address why this became a duopoly in the first place and why Copart specifically has become a 50% market share player. Because that's, that's a massive dominance in, in an industry. There's a few big competitive advantages. One, owned real estate. So this, anytime you read or hear about Copart, people are going to bring this up. Copart owns about 90% of its real estate footprint instead of leasing the land. And this is one of those things where if you were thinking two quarters out or if you were a rollup, you probably wouldn't choose to do this. You'd probably choose to go with the lower cost option and lease it. But if you're thinking 20 years out and you're an owner operator like Willis Johnson was, this is the strategy you would do. And it sounds kind of simple. They own it instead of leasing it. But this is actually a pretty massive cost advantage for Copart. Copart owns about 20,000 acres of land, which is equivalent to 240 salvage yards for them. If they leased the land, the landlord or the property owner could consistently increase costs, obviously, which if you have tons of vehicles sitting on a lot for months awaiting title clearance, that can be an issue. So that's a big cost advantage for Copart. They don't have to deal with price hikes from a property owner. They again, they own the land. And a lot of the land is, you know, totally paid for. Most people. The other element here is most people don't want a junkyard or a salvage yard in their neighborhood. So it's the NIMBY effect, not in my backyard. This makes it pretty difficult to replicate the footprint that Copart has to be able to purchase these big lots and set it up inside a community. I think most people would have some pushback with that. This does it kind of make sense, the real estate advantage here, how it creates a cost and ultimately margin benefit
- [19:55]
Brett Shafer
for Copart definitely does. I think another factor because I was looking at and maybe the locations in other cities are closer to the city center, but it wouldn't be technically that difficult to get cheaper land outside of the city. But if you already have one big one in an area, say north or south, depending on how your city's mixed, maybe you have one kind of outside in all four directions for a different city shape. But if you have one, you don't necessarily need two. And maybe if you have that and IAA competing with each other, it would be hard. Again, that's where the airport analogy comes in, where you have the scale of the relationships. You're not going to just put it another airport next to the existing airport. That makes zero sense to me. Yeah, I think that along with the real estate advantage can give them maybe better margin. Have they talked about how they have a cost advantage because of this or does IAA run the same type of strategy?
- [21:00]
Ryan Henderson
IAA leases their land for the bulk of their land. Maybe there's certain yards that they own. But think about the problem that presents for iaa. Like it you're charging the insurance companies or the buyers 15% and you're like, think of that as your ceiling. Your revenue and your floor is what you're paying in rent or leasing for it. You're going to have to keep increasing prices to sustained margins, which in theory, Copart, if they charged less, would aggregate more volume. But instead Copart is actually commanding higher prices and just basically doubling the profit margins for compared to iaa. So it could either be, I think if Copart wanted to, they could reduce what they're what they're charging both on the fixed fees and maybe in the commission structure. But they don't need to to to be compatible in my opinion. So that that's one big advantage for them. The second one is the network effect. So Copart spent decades pioneering the digital salvage vehicle auction. They are now on their third iteration of this tech which, which they call VB3 virtual bidding. Third generation VB3 is home to 750,000 registered buyers across more than 190 countries. Keep in mind, not just US business. So vehicle from Brazil or vehicle in the US might be more suitable for a Brazilian buyer, that kind of thing. Copart's auction prices are consistently higher than comparable vehicles on IAA because of this massive buyer base. More buyers means more competing bids, more, which means higher auction prices, which means more revenue per vehicle for the insurer on the buyer side. They've also developed a bit of a lock in here. So buyers want access to the most inventory possible and that's why they go to Copart generally. But the other part is their bid history on Copart creates credit limits which gives them access to higher value inventory. So Copart's partnered with credit providers that will extend financing to these buyers, depending on their sort of credit history with Copart. So there is sort of a buyer lock in and then there's obviously the seller lock in. Sometimes they have even exclusive agreements with insurance companies, which we'll talk about in a sec. Not all of them are exclusive, but they have lock in on the seller side, lock in on the buyer side, which creates quite a powerful network effect. And then the other part, and this is one that I think gets swept under the radar. This is the actual like sort of workflow lock in. So Copart was the first operator to really professionalize the salvage auction process. They invested heavily in technology when a lot of auctions were still being done in person. This created a bigger advantage than people probably, maybe even they thought would be possible. So Copart's API is really deeply embedded with a lot of the US auto insurers. I've got this quote. There's a great write up from, I believe it was called Markman Capital Insights. Here's the quote. It says the largest US auto insurers have built their internal total loss workflows around Copart's API. When a vehicle is declared a total loss inside an insurer's claim system, that decision triggers a workflow that pulls Copart's VIN decoded valuation schedul. A Copart tow books a yard slot and submits documentation through a Copart hosted portal. Migrating that workflow to a competitor is not a procurement decision. It is an enterprise IT project that takes 18 to 36 months and disrupts hundreds of thousands of monthly claims while the new pipeline gets tested. Think about the adjuster, like think about the smaller auto insurer. Maybe not the giants that have the personnel that they can develop this IT project. But if you've built the system up, system up, and you've been doing it for 20 years where anytime you've got an insured driver that has a totaled vehicle, you press that Copart valuation API and it triggers the entire flow from there. And they pick up the vehicle, they get the best price, they send the money along to you. It's really kind of a pain in the butt to disrupt that. Now if you look at revenue for Copart versus RB Global, it's sort of flat. Well over the last two years they've both grown at sort of a similar rate. RB Global has grown a little bit faster but the real market share taking that they've had is in units. So more vehicles are being processed. A higher share of vehicles are being processed at IAA compared to Copart. Now, now, sorry, maybe phrase that wrong. IAA is taking share in terms of vehicles processed. Why? I think it's a logical question and from what I can tell it's all pretty much due to one auto insurer. So the for a little bit of background, the auto insurance company in the United States is dominated by only a few providers. State Farm, Progressive, Geico and Allstate. Those four account for almost 2/3 of automotive premiums in the United States. State Farm and Progressive are the two largest by far. From what I can tell and from industry reporting. Almost all the market share losses that Copart has had over the last four or five years has come from Progressive trying to reduce its dependency on Copart. They're in the middle of rolling out this multi carrier strategy which basically means Progressive is just offloading some vehicle volume from Copart to iaa. The reporting is that IAA has offered some big pricing concessions here and it makes sense from Progressives point of view if you're the biggest insurer to not have that bottleneck I guess of just relying solely on Copart as a supplier. So that is where I believe pretty much all the market share losses have come from is progressive shifting volume.
- [27:44]
Brett Shafer
You research your investments, you analyze markets, you manage risk. But did you research your broker? For the past three years, IBKR individual clients averaged an annual return of 24.3% compared to 23.1% on the S&P 500. IBKR's lower trading cost compared to competitive rates, efficient execution and access to more than 170 global markets helped investors keep more of what they earn and put more capital to work over time. The broker you choose matters. Interactive Brokers member SIPC if you care about performance, find out why the best informed investors choose interactive brokers@ibkr.com performance it makes sense when they have some Sort of a scale as well. They want to play the two companies off of each other. It's like the Joker and the Dark Knight. They're going to have tryouts for everyone, little competition. Yeah. Not surprising that they're doing this. I think maybe if you're a Copart investor, you probably want good competition within the insurance space. It seems like there is, but Progressive has been a massive winner in the last few years and you probably don't want them to become. Not necessarily they're going to be a winner's take all, but like a huge market share owner where they kind of just keep stealing share from Geico and what have you. You would hope that there's still more, you know, five to 10 large competitors in the United States where Copart really has the two big players. Yeah.
- [29:12]
Ryan Henderson
And this what has driven these market share losses in theory should flatten out. Because if Progressive is trying to reduce dependency on a single player, they don't want to keep shifting more and more volume to IAA because then they've got dependency on iaa. So in theory that should start to flatten out a little bit. But part of it is shifting volume. But also, you mentioned it, Progressive also taking share, becoming sort of the elephant in the industry in terms of vehicle, totaled vehicles.
- [29:51]
Brett Shafer
And is this the only reason why the stock is down? Because I see. And you can probably, you know, a lot of analysts are looking at. This is the revenue growth chart. We know everyone loves this chart. You don't want a decelerating company, you want an accelerating growth company. And outside of the pandemic, this is the only period, the last few quarters where Copart's revenue has been flat to maybe slightly positive to slightly down. Essentially flat. They're not, they're kind of stagnating. Is there any other reason why the stock has gone down, what, over 50% to. As we'll get into the end here, its cheapest valuation in years.
- [30:29]
Ryan Henderson
Yeah. Totaled vehicles. Total. Totaled vehicles. So total vehicles that have been totaled.
- [30:37]
Brett Shafer
The supply of totaled vehicles, yes.
- [30:40]
Ryan Henderson
Dropped, I think 10% relative to 2024, 2025. And so there was a major drop. Part of that was, I guess there's less insured drivers on the road. So auto insurance has become unaffordable for a couple million of customers, which again,
- [31:01]
Brett Shafer
you had to have that.
- [31:03]
Ryan Henderson
Well, you have to have it, sure. But you know, if people can't afford it or whatever, they aren't necessarily going to stop driving.
- [31:12]
Brett Shafer
That's fair.
- [31:13]
Ryan Henderson
That becomes their problem down the road, obviously. But yes, it's that has been a headwind. And then the other part is less catastrophes.
- [31:23]
Brett Shafer
So
- [31:25]
Ryan Henderson
part of the volume is the situation we described where someone gets in an accident and the vehicle gets pushed to the tow yard. The other part is if you have a hurricane, those vehicles are totaled. If you have a massive storm, those vehicles could potentially be totaled. That could be even a fleet of vehicles from a dealership or something, for example. So that drives a lot of volume for them as well. And there were less catastrophe or natural disaster driven vehicles funneled into Copart yards. So kind of a double effect there. Market share losses plus industry contraction. But I on the natural disaster front, I'd argue that's temporary. I mean there's going to be some lumpiness there naturally.
- [32:20]
Brett Shafer
Okay, one more question before we talk about the CEO change up the international revenue. I'm seeing 836 million versus 4.6 billion in total revenue. So small part of the business but it's growing at this might be a tough comp or easy comp coming out of the pandemic. 17% annually since October 2020 to April 2026 on a trailing 12 month basis. Do you know what the strategy is here? Where their locations are outside of the United States? Because again if there is that fear of decreased supply in the US and the two companies here kind of have that duopoly share, there's maybe not that much growth to be had from a unit basis. Maybe they can expand around the globe.
- [33:08]
Ryan Henderson
Yeah, they are adding more yards not just in the US internationally. I think they operate yards in seven countries, 11 countries looking here, US, Canada, UK, Germany, Ireland, Spain, Brazil, Finland, UAE, Oman and Bahrain according to their website. The other part is there's a lot of international buyers. I think this is probably a tailwind for their business. They again that that same network network effect holds true in in other countries. Right. So it's not like they have to restart from scratch like you would say with like if Planet Fitness decided to expand into Spain. They have to build their brand up from scratch. Copart doesn't necessarily have to do that because they have a global buyer base to begin with. So they, they enter those markets with a massive advantage. My guess is that will continue to be a benefit for them. And I don't know what the insurance, the auto insurance industries look like abroad, but my guess is they're probably not quite as consolidated as the US Maybe not as much dependency on progressive or a single player as the US you could see.
- [34:23]
Brett Shafer
Yeah, probably less maybe free market policies too. I'd assume but you never know. Each country is different. Yeah, but that could, I mean, it's a small part of the business that I think even though the United States car market is massive, the international market as a whole is definitely much larger. Maybe could be similar to what autozone is doing by expanding to Mexico and Brazil. That could be a nice tailwind to boost revenue growth over the next decade. But let's talk about the management shakeup. You never like to see this if you've been a holder of the stock and it's in like a 50, 60, 70% drawdown. But it could be a nice indicator if you have it on the watch list that a new manager or as this as Ryan's going to talk about an old manager stepping back in. What happened with the CEO here and the executive suite? Take us through the story and your thoughts on that.
- [35:15]
Ryan Henderson
Yeah, and just to give some numbers on the international size, it's about 20% of revenue for Copart over the last 12 months between the fees and then the commissions. But yeah, on the CEO side, just to back things up, Willis Johnson founded Copart in 1982. If you end up wanting to learn more about the company after this episode, I recommend looking into Willis Johnson. He's a pretty interesting guy, very sort of classic entrepreneurial story. He served, I think in Vietnam, came back just. His dad ran a junkyard. He worked there. He thought that they could be far more efficient and he proved it. It reminds me a lot of the O'Reilly Automotive story. But yeah, again, recommend reading his book Junk to Gold. But anyways, Willis Johnson ran the company from 1982 to 2010. 2010, he stepped down. Still a very important part of the company. I think he's in his 70s now. He's the chairman of the board, owns 6% of the outstanding stock, but no longer the CEO. He handed the reins over to Jay Adair. Adair had been at the company for more than 20 years. He started as an entry level operations manager at the age of 19. He served as CEO from 2010 to 2022. And over that time, over his entire time at the company, he's amassed nearly a 3% stake in the business. So a lot of insider ownership here between Adair and Willis Johnson, they own almost 10% of the company. So that's very powerful for them. His time, Jay Adair's time as CEO was by pretty much all measures a success. The only knock you could potentially have is that by the end they started to see their market share declines from progressive. But that also might have been inevitable. So not sure you can really knock him for that. Where it gets a little more interesting is that in 2022, they started trying to transition away from Adair or trying to phase him out, and they made Adair and Jeff. Leah Lau. Sorry if I'm mispronouncing it co CEOs from 2022 to 2024 so that they could sort of pass the torch in 2024.
- [37:39]
Brett Shafer
That's always tough. Co CEOs. Unless you're someone that seems to have this immensely strong culture like Netflix, it never works, even temporarily. It's.
- [37:50]
Ryan Henderson
So, yeah, I mean, there's just hard.
- [37:53]
Brett Shafer
A lot of bad incentives.
- [37:55]
Ryan Henderson
It's always hard to know what's going on behind closed doors because, you know, it's possible that this. That all the CEOs like each other here or all the executives like each other and that, you know, something happened in his personal life, whatever, you know, I guess just to keep going here. Liao Lau, sorry, I can't really say this last name. Took over as CEO officially on his own in 2024. He had joined as CFO in 2016. So he'd been there for a little while. Everything looked good and there wasn't. Honestly, there wouldn't even have been much worth discussing here if it weren't for the news that came through last week. Last week, the company announced that Jeff Liaw, again, sorry, I keep mispronouncing it, will be stepping down and Jay Adair would become CEO again. They tried in the press release to make this sound as amicable as possible, even explicitly stating that there was no disagreement between Jeff and the board and that Jeff would be staying on as a special advisor to Adair. He's also getting, I think, $650,000 in a severance package. But. So again, it's possible that Jeff just didn't want to be CEO anymore. Stock dropped 50%. Maybe he didn't like the criticism or the responsibility that came with it, but at the end of the day, it's a pretty bad look. The CEO, after seeding market share for four or five years, stepping away and the old CEO stepping back in. It gives me the Disney ick, the worries that it's a management team that. That can't seem to pass on the business gracefully. But again, part of this is all alleviated with the fact that there's great alignment here. Willis Johnson and Jay Adair have combined, like, more than $2 billion invested in Copart. They want this business to succeed. Willis Johnson owns 6%. Jay Adair owns 3%. And Adair has proven that he could be effective before. So I, I, I don't necessarily know what to think here. And without having context on why he stepped down, I can't really have any strong takeaway, negative or positive.
- [40:32]
Brett Shafer
Maybe it's losing the market share here, maybe they sour the relationship with Progressive. But it can't be bad that he's returning. It could potentially be positive. But as we'll get into here, the the problems might just be something that gets through to the other side of a short term cycle. So what is your analysis Ryan, on the problems of market share losses and the macro? I mean we can maybe talk about self driving cars ruining the entire business. Is that the long term bear thesis 20 years from now? Oh, probably people would have said 20 years in back in 2016 as well. What about Cobart's problems? Are they temporary or not? Because that's the big question with the stock again down so much. And we'll Talk about the PE is down to 18 EBITDA. EBITDA's down to 12. You don't need that much growth here. A little bit of a reversion to the long term growth of the 5 to 10% level probably gets you a solid return.
- [41:42]
Ryan Henderson
Yeah, there are, well, first of all, I'll just say if every vehicle is self driving, yeah, Copart's probably going to be processing a lot less vehicles. That feature seems a long ways away, if even feasible at all. For the better part of 40 years they have had some very helpful structural tailwinds. So for starters, there are more cars on the road today than there were in 1982. Significantly more. And up until really, I'd say the last year or so, cars on the road has gradually increased and insured drivers on the road has increased as well. In America at least. Typically it's not, not a huge, it's not like exponential growth, but it's 1 to 2% gradual increases. The other part that has really helped them, especially over the last decade, is that total loss frequency has risen since modern cars are packed with so many sensors and cameras. It doesn't actually and recalibrating them can apparently be very expensive. It doesn't take as serious of an accident to total a car because the sensors and cameras increase the cost of repair massively. So that's led to insurance companies saying claiming more cars is totaled and and sending more cars to Copart. The same applies for electric vehicles apparently as well. It's easier to total an EV than it is to total a older combustion Engine vehicle. So all of that has helped. Increasing globalization has helped with international buyers coming more into the scene, ultimately driving a higher price per vehicle for Copart, which means more money for the insurance companies, more money for Copart, et cetera. Yet Copart is reporting its slowest growth in more than a decade. I think think we already talked about why this is happening. Partly it's because of the market share losses or progressive shifting volume. But the other part is it's just been a tough year. There's less vehicles going through their system because there's less vehicles being totaled. It's kind of sad to think about this, but if you have a massive natural disaster that bodes well for Copart in terms of volume. So that's going to hurt them. And it hurt them I believe to the tune of like 5%. Like there were, I believe the number was industry vehicles totaled across America was down like 9.8% year over year. Half of that was attributable to natural disasters. The other part was attributable I guess to less insured drivers on the road. So I think there is obvious lumpiness in terms of volumes. But my guess would be that five years from now there will be more vehicles that are totaled than this year.
- [44:48]
Brett Shafer
So if you are long Copart, your long tornadoes, hurricanes and earthquakes in a
- [44:55]
Ryan Henderson
sense, I guess I just do occur.
- [44:58]
Brett Shafer
I mean there are long be year to year. But as Buffett does with the Berkshire natural disaster Insurance and the long term reinsurance there, some years will be bad, some years will be good. In their sense it's the opposite. Where there'll be one year, well, there's a bad earthquake for an area, they're coming for Copart. There might be one year where it's super tame in their areas. Other years it's not.
- [45:23]
Ryan Henderson
Yeah, and the other part to think about is like the more, the more automated that the car manufacturing process gets, the more like the higher the loss frequency will be because like say Toyota is able to keep driving down costs. It's be able, it's able to continue to become more, more and more efficient on the assembly line. The that means okay, they've got all the sensors, cameras calibrated in place, all of that stuff, you know, done by robots. It doesn't cost them much. They can sell the vehicle, a more valuable vehicle for less. In theory. Repairing the vehicle still costs a lot of money. So it's going to keep driving up the loss frequency. I think that tailwind will persist. My guess is that the last 10 years of loss frequencies Increasing is going to persist over the next 10, especially with electric vehicles.
- [46:28]
Brett Shafer
Okay, let's get to the last two sections. We're going to talk valuation, capital allocation, kind of capital returns here and then get to your investment decision valuation I'm seeing here at our friends at Fiscal AI. As everyone knows, use our link Fiscal AI Chitchat. Get a 15 off any paid plan. Check it out. The link is in the show notes the EV to EBIT as of when you made the screenshot. I'm assuming either within a couple days of recording. This is being recorded on July 1, so if anything radically changes. I don't think it will, but it's at an EV2 EBIT of 13. So tell us why it's gone from historically upwards of 30 down to. Well, well below that.
- [47:15]
Ryan Henderson
Yeah, and it's up slightly today, but still, yeah, EV to EBIT, basically 13. So let's go through the numbers. Over the last 12 months, Copart generated $1.4 billion in net operating profits after taxes. That's roughly equivalent to their free cash flow. Free cash flow is slightly lower, but they currently Trade at a $26 billion market cap and a $22 billion enterprise value. So they've got a really clean balance sheet, actually $4.2 billion in just pure cash with no long term debt whatsoever. So very, very clean. The enterprise value to no pat operating profit after taxes, which I think is a fair valuation metric to use, stands at just under 16 times. Now there could be some interest income as well because they've got 4.2 billion on the balance sheet. So maybe you could use net income, but let's assume mid teens earnings multiple or lower. The only reason I didn't include the interest income is because they are starting to use that cash balance. So this is their cheapest valuation in pretty much a decade. Management has responded to the drawdown by spending a ton of money on buybacks. So I've got a free cash flow vs buybacks chart here and basically they are opportunistic share repurchasers. So they wait for the right time and then they plow money into the buybacks. There has been basically no repurchases for 40 quarters until the last two quarters. In the last two quarters they spent 1.4, well, $1.6 billion on buybacks. Keep in mind that so six months they, they bought back more than 4% of their stock. They reduced their shares outstanding by 4% just last quarter. So they are getting very, very aggressive. The question here as to whether or not the investment will Work is, do you believe Copart will be processing more vehicles in five years? I think if you believe the answer is yes to that question, you probably generate good returns from here. And the equation is pretty simple. Vehicle volumes plus higher average selling prices plus margin expansion. Keep in mind the owned real estate has helped with a lot operating leverage. Again, margins can be lumpy too, but really over the last decade margins have trended higher. So margins higher selling prices, higher volumes plus share repurchases. I think you've got a pretty simple formula for 10% plus profit growth on a per share basis. It's hard. I can't imagine there's going to be more multiple compression if they are growing volumes again. So I would say that probably shakes out to about what your returns would be unless you get multiple expansion as well.
- [50:18]
Brett Shafer
Yeah, they stagnate. You can maybe see some multiple compression, but it seems like we're pricing in famous last words, a lot of compression there and looking, or sorry, stagnation already on that volume given where the EBD EBIT is. And if you look at that chart again, a fiscal AI chart that we have here in the show notes the free cash flow, again, fairly steady. If you look at a trailing twelve month basis quarterly, it's a little lumpy versus the buyback. This is one of the most aggressive they've been in history and the most aggressive by far in the last decade. So if you look at the next five years, if the multiple doesn't go anywhere, they could probably take shares outstanding down by 2030, maybe even higher. 20, 30, 40%, which is not a bad place to be in unless you think the business is totally going to collapse. So, Ryan, this is kind of. And we had a show last week talking the same thing. A lot of fallen angels out there or potential falling knives, you know, value traps. There seems to be a lot of potential opportunities of stocks trading at cheap multiples. They've historically been, you know, durable growth compounders. Are you buying shares of Copart? Do you see something in your existing portfolio you could switch out or is it staying on the watch list for now?
- [51:45]
Ryan Henderson
Yeah, my only hesitation would be opportunity cost. It just seems like a lot of great companies are trading at attractive valuations at the moment. But I think you get 10% plus annual returns over the next 5, 10 years with Copart. I think this makes for a pretty good investment. I will probably buy some shares. To me, the. The only thing I'd really like is context on why insured drivers are dropping. If that's a headwind that's going to persist. Like if auto rates are so unaffordable that just more and more low income consumers are just going to take the risk of being uninsured. That's a real potential problem. But my guess is also that there would be some sort of, I don't know, government step in if that's the case, if more and more drivers on the road are just driving around without insurance, that, that's a problem, that's a societal problem. So I'd like to know what's going on there. But I think you look at the buyer network. The part that got me the most excited about Copart was actually that little piece about the API where if you're an adjuster at this insurance company, you're clicking one button and basically boom, everything else is going through Copart and you just want the highest price that Copart can get you at their auctions. That to me seems very, very durable over multiple decades. Even if Progressive hits the IAA button a couple more times, I think Copart's going to ultimately be just fine.
- [53:43]
Brett Shafer
All right. Yeah, I think it's the same for me. I look at my portfolio, I kind of think I see from at least existing holdings if you're going to replace something, especially with the tax hit you're probably going to have, if it's been a winner, you want to have the replacement in this case being Copart having a significant better risk reward or higher upside than you believe in your current portfolio. And now again, it's been slightly painful not being really long the AI trade, but it's been nice the last few weeks, I guess with some of those stocks falling, having so many opportunities out there of these falling compounders is kind of a problem of too much opportunity if you want to allocate 100% of your portfolio. So yeah, I think Copart, you probably do significantly better than cash over the long term, especially if they still have good capital allocation. And I guess, you know, you're not locking it in, but I think it's a high chance of 12 to 15% returns over the next decade unless they again, unless that risk comes to bear of the volume totally collapsing across the industry or the self driving truthers material, you know, if the, what would you call them, the self driving accelerationist maybe are correct. Which I think that's going to be a multi decade thing and there's probably still going to be people that want to drive. It's going to be a mixed market. So yeah, I feel like it's, it's, it's fairly low risk at these levels. Famous last words. But maybe if you want to fade us, this is not the best podcast there is.
- [55:30]
Ryan Henderson
I guess a headwind we didn't talk about is like better and better driver assistant technology potentially reducing, reducing the amount of auto crashes that even if it's not full self driving, if you know, if cars are stopping on their own before hitting a vehicle, that's, you know, a headwind to Copart. It's good for society. But I had one to go park.
- [55:57]
Brett Shafer
Yeah, that is fair. Maybe people getting distracted on phones, you know, people driving high on marijuana, which has been a decade long term. That's a bold thesis for Copart. They have weird incentives. Not like they would actually drive that behavior, but the out some bad outcomes. You know, you crash and total your car, people aren't happy. That's a positive outcome for Copart. That's more volume.
- [56:22]
Ryan Henderson
What about you? Did this pique your interest?
- [56:26]
Brett Shafer
It does. If I got to a point, which unfortunately I'm not, where a lot of my existing portfolio turned into massive winners and I was like, ah, a lot of the valuations here don't look too attractive. I could definitely switch this in for an existing holding. But like a lot of the companies I've been looking at the last few months, I don't see too many new ideas that are more promising than my existing portfolio. So it's on the watch list for sure. I've been following it. I'm glad we got to learn more about this stock because I feel more confident in kind of where they sit within the industry. I guess for the listener that said we didn't know anything, hopefully we know a little bit more now. They're not just junkyards. And that was incorrect to say that by any means. But I like it feels like, yeah, rock solid investment.
- [57:19]
Ryan Henderson
Let me pose it.
- [57:19]
Brett Shafer
Maybe I'd own if I was much older. Kind of looking for some stability in retirement or old age.
- [57:28]
Ryan Henderson
Let me pose it to you this way. Copart at basically 15 times earnings or Wix today.
- [57:39]
Brett Shafer
Wix at 5. I guess true earnings might be 10. That's tough because full disclosure, I don't own WIX right now.
- [57:51]
Ryan Henderson
You did not?
- [57:52]
Brett Shafer
No. Tax loss harvest. Yeah.
- [57:55]
Ryan Henderson
Interesting.
- [57:56]
Brett Shafer
It's been an interesting year for, for me and wix. But I mean I look at the for full disclosure for anyone that I guess doesn't subscribe to the newsletter. The one I kind of look at now is IBKR. They're training in like a PE of 35, but I think they have a massive growth opportunity to head. Would I replace them with Copart? I think that's a pretty even match if we're kind of deciding what's the better risk reward here. But I look at IBKR's growth trajectory and I think it's massive. So you got to match that up. And to replace an existing holding, that's been a nice winner, you really need another hurt, like just something that seems clearly a better opportunity. And again, Copart versus cash, I'm taking that 100% of the time at this valuation. But Copart versus the existing opportunities, my current holdings. I like the current holdings.
- [58:54]
Ryan Henderson
All right, I think that's going to do it. Do you want to sign us off here?
- [58:58]
Brett Shafer
I can do that. All right. Thank you, everyone, for listening. As a disclosure, as a reminder, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan Irony Podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you, everyone for tuning in. Thank you to our sponsors, interactive brokers and fiscal AI, and we'll see everyone next time.