TIVP042: Copart (CPRT): The 100-Bagger Junk Yard w/ Daniel Mahncke & Shawn O’Malley

24:57To begin getting smarter about investing, just visit theinvestorspodcast.com slash get started with stocks. That's theinvestorspodcast.com slash get started with stocks. And for a limited time, you can use code stocks15 for a 15 % discount at checkout. As you said, no one wants a salvage yard in their backyard. So permits for new sites, they're just incredibly hard to get. And this makes Copart's network of yards and not just an operational advantage, but I would say it's basically a near impossible barrier to entry. And compared to IAA, they never face rent increases or even just the possibility of losing the right to operate a yard.

25:36And one interesting side note here is for anyone who wants to look into the business or the financials of Copart or even IAA themselves is that by owning the land, Copart appears much more profitable at first glance because while owning the land does help with profitability in general, it does not help to the extent that margins would suggest. Copart's margins are significantly higher than the ones of IAA. And that's because the costs for its yards show up as capital expenditures rather than lease expenses. And that way they basically circumvent the entire income statement and therefore inflate margins at first glance.

26:11it is kind of confusing when you first look at coparts numbers because i remember you know pulling it up on finchad and i'm looking at it i'm thinking okay how is this company so so profitable for what is after all a junkyard business because you know really it almost looks like from a margin profile it almost looks like a software company you know you've got gross margins at 45 percent operating margins at 36 percent for context i believe that's higher than alphabet and so it's just clear that Copart operates with this really highly efficient model, of course, and there is an online component to it that is software-based.

26:48And then also you have these accounting discrepancies that it's not cheating, but it's just something that as an informed investor, you have to kind of be aware of and look out for that kind of thing of, you know, it's not exactly an apples to apples comparison because there are these subtleties to how Copart's margins are calculated. So even, Like I said, if I compare the operating margins of Copart to Alphabet, the business models are so different that the comparison is borderline meaningless. So the point being, even if these numbers are slightly inflated due to the way Copart capitalizes its land costs, that's the sort of accounting jargon we were talking about.

27:25The free cash flow margins, which basically would account for that in them, are still a very impressive 26%. So, you know, this is a company that no matter how you cut it is still very profitable. and very capable of generating cash. And I think it's just, it's a very unique and robust business model that has been very durable for decades now, as we've seen. It is not a cyclical business in the way that you might think. And if you just pull up the balance sheet for Copart and compare it with the information I can find on IAA, which we've got on screen right now, it looks like Copart is really kind of the more conservative company here too.

28:05You're taking on less financial risk and also getting a business with higher quality operations. They've got almost $5 billion in cash and cash equivalents with very, very minimal long-term debt, I think in part because they own a lot of the land itself. So there's not really much need for them to have debt. And so the numbers I have on IA are not necessarily up to date, but as of at least a couple of years ago, IA had a net debt of$3 billion, which is just a very, very different position to be in. And when we were chatting before our call, you mentioned that IAA introduced these online auctions actually during the financial crisis in 2009, whereas Copart started in 1996.

28:44So that's a 13-year first mover advantage that has been compounding in Copart's favor of building customer stickiness, more iterations of testing what works and what doesn't work. And really, it wasn't until the pandemic hit that IAA pivoted to really trying entirely do online auctions. And considering how important those online auctions have been for Copart and specifically their international customer base, it seems like Copart must be years ahead of IAA, I would think. They definitely are. And when I was digging into Copart, I was more than surprised seeing that IAA is so far behind because it's making sense that in the late 90s, you basically do not yet see how the internet could change a junkyard business.

29:29But at some point, you got to realize that your competitor is doing way better than you and you should copy what they are doing. And it just took IAA a while. I mean, Copart launched its first fully online auction in the early 2000s and it's patented this virtual bidding system, which has improved ever since. And I think it's currently in the third generation. And fortunately for IAA, insurers have no incentive to turn this market into a monopoly because if Copart controlled the entire market, insurers would lose negotiating power and risk being squeezed on the fees by Copart. So even though Copart has gained share from IA in recent years, and Geico, for instance, is one of those insurers which switch much of its volume to Copart, there's a natural ceiling on just how dominant it can become.

30:10Because as I said, there's no incentive for insurers to make this market a monopoly. Well, if I can just quickly ask you, do you know why or how would you explain how Copart has been able to continue to gain market share? I think there are many smaller reasons for why. And in some way or the other, basically most come back to trust. Since Copart owns the land it operates on and runs its business with real operational discipline, insurers know they can always rely on Copart. And more importantly, they know they're likely to get better results too. And this platform's liquidity advantage means more bidders, which translates into, as I said before, higher selling prices for the cars.

30:48And at the end of the day, businesses want to make money and insurers want to make money as well. and Copart is just the better option for them to choose. And a great example of how this trust is influencing their decision to go with Copart is how Copart handles catastrophic events, so-called CAT events, like hurricanes where suddenly hundreds or even thousands of cars get totaled within a matter of days. And at first glance, you might think, okay, well, this should be great business for salvage companies. But in reality, it's incredibly challenging because everything has to happen at once. The towing, the storage, you even have to pay overtime for so many employees they're just getting expensive and logistically complex for a company like Copart or IAA to handle that.

31:28And because of that, IAA has often pulled back in those situations, refusing to get involved when the economics looked too risky. And Copart took the opposite approach. They actually said, we are going to create an initiative, which they call 2020, which was essentially a commitment to always be ready when large-scale catastrophe hits. So insurers could really counter them as a reliable partner. And it's probably not a coincidence that since that program was put in place, which was somewhere around 2016, Copart has significantly outperformed IAA and gained significant market share from them. I have to ask whether you think that trend will continue where you have Copart continuing to gain market share just due to the dynamics you mentioned before, where I'm kind of thinking of Porter's Five Forces, where you have the insurance companies getting nervous, like, OK, we don't want Copart to wield too much power over this market.

32:16And I mean, I guess there's a game theory perspective of it because insurers are not acting as a collective single entity, but they're all acting in their own best interest. But at some point you would think there would be kind of a consensus of, hey, maybe we need to step in to balance volumes out again. Otherwise, Copart is going to have way too much leverage over us. I think that's pretty on point. I believe it's more likely we will see a reversal of this trend instead of a continuation. and most likely not back to the levels of 2016, which would suggest that Copart is losing significant market share.

32:49But IAA has made significant improvements because it was acquired by RB Global. And since then, they really changed up the company quite a bit, not necessarily the culture, but they have, for example, significantly increased land capacity since the takeover. And just four years ago, Copart had about 70 % more land capacity than IAA. And today, it's closer to 25%. So it's obviously easier to scale if you lease or rent instead of buying the yards. But in the short term, I would say this makes IAA a stronger competitor regardless. And competition outside the US looks a little different. And that's probably where a lot of the bullish sentiment for Copart is sitting in the future because the business model is less proven over there.

33:27So Copart doesn't have a big counterpart as they have in the US. So they can really take a lot of the market share early on. So for the audience, I mean, this is probably, I imagine it gets hard to track the industry dynamics and the composition of a business when we're just kind of talking out loud. So maybe just to take a step back, I would say Copart's moat, as I understand it, really rests on three main pillars. And the first is on the physical side. So that's the land in the salvage yard network, which in today's regulatory environment, it was a lot easier to build these decades ago. And now a lot of them are in very desirable locations where otherwise they would really not be approved if cities and municipalities had their say about where junkyards could be put because now you have maybe suburban neighborhoods around them.

34:17So it would be very difficult for competitors to come in and replicate the value and the proximity of the land that Copart has just because of the way these areas have developed. That's the first pillar. The second is the technology platform. Copart had this first mover advantage in building out a global buyer base years before any of its competitors really understood how important that that would become, it seems like. And that early lead still matters today, obviously. I mean, it's probably not hard to technically replicate what they do from a software standpoint, but that's true with a lot of companies.

34:54And really the advantage is the first mover advantage. And the scale that comes with having this two-sided network where it becomes very difficult to compete with that. And what does it mean when I say two-sided network? Well, you know, two-sided network is, it's a vibrant marketplace for both these sellers. It means it is the best place for somebody to come and sell something and also the best place for somebody to come and buy something. And you get more of these mutually beneficial transactions. And there's not this asymmetry and you have a lot of people wanting to buy something. There's not a lot of supply or vice versa.

35:21And it's that scale of the two-sided network that allows Copart to really consistently deliver the best prices because it has the most liquidity, which makes it the most profitable way for insurance companies to dispose of their cars. And I think we can really think of this as like the third mode. And the expansion of the network of facilities creates additional economies of scale, right? The more facilities you operate, the lower your operating expenses are just by reducing the distance for towing, for example, or by just being closer to the action in case of these CAT events. And overall, it's just a pretty compelling value proposition.

35:57Just last week, we talked about FICO, and it's an incredible, strong company with an incredible, strong market position. And I don't know if I would go as far as saying Copart's mode is that strong, but honestly, I struggle to see how a new entrant could realistically break into this business as scale, especially because there are so few companies that have been run with the same long-term mindset. There are multiple generations of CEOs. There has not only been Willis Johnson, but also the two CEOs following, which basically follow the exact same culture and just keep Copart going for the way that Willis Johnson would have wanted it.

36:32And even in international markets, we still have the risk of a local competitor copying the strategy. And then Copart is the first mover, and it seems to be the company scaling the fastest. And that gives me a lot of confidence that Copart's market power will continue both in the US long term, but especially also internationally. So whenever we're thinking about adding a company to our portfolio, and obviously we're considering Copart here, the biggest consideration after we've started to wrap our head around what works for the business is then to think about, okay, well, what are the risks to it?

37:05What could make this business no longer work? And obviously if it's working today, the risks of the past have not manifested, but that's not true indefinitely. And to me, I have two potential risks that come to mind. And obviously I'd be curious to hear if you have anything else in kind of your reflections on these risks that I see. So the first is ride hailing. And, you know, we really like Uber that the more people rely on services like Uber, the fewer cars are actually owned and driven, or at least it becomes less of a necessity to have to own a car, especially if you live in a city where there's already alternative transportation options, and then you layer in ride hailing.

37:45And so, you know, fewer cars on the road could mean fewer accidents, which in turn means fewer vehicles ultimately ending up in coparts yards. And then the second one, which I think is really related to that first point is autonomous vehicles like Waymo. And I've talked about multiple times how blown away I was when I went to Austin and I saw these Waymos just driving completely by themselves without a human in the car all around the city. And honestly, they looked more competent than most of the human drivers on the road. So they're not perfect yet, But I mean, it's pretty clear the technology is moving in one direction.

38:23And at some point, they will probably have lower rates of accidents than human drivers in many places. And so if those accident rates do drop sharply, that would be a great thing for society. But as shareholders in Copart, that would mean much lower volumes for Copart to process. And it would actually be bad for the business. To some extent, they rely on a certain amount of a lack of safety in driving. You know, we've spent so much time thinking about Uber and just by extension, mobility and also AVs in general, that it's not surprising that you already nailed what I would call the two biggest risks for Copart.

39:03and just for the audience, after our episode on Uber, we kind of fell in love with the pitch and the company itself. And we've talked about it quite a bit in our community. And just recently, Sean and I actually hosted a call where we went through the bull and the bear case again. And Uber has definitely been just top of mind for us. So before we dive deeper into those specific risks, though, I would say we should quickly zoom out a bit and talk about how risks in general look for Copad. And at its core, Copad's business is cyclical and it's tied to forces that are, I would say, completely outside of its control.

39:34The single biggest driver of supply into Copart's yards is what's called total loss frequency. Basically the percentage of accidents where insurers decide a car isn't worth repairing. And not only does Copart have no control over the number of accidents that occur, but it's also dependent on used car prices. When they are high, insurers are more likely to authorize repairs rather than just ride off the vehicle, which means cars flow into Copart's system, if they stop doing that, that would be a problem. Another important factor is whether natural disasters like hurricanes, floods, or even just hailstorms can suddenly push huge volumes into Cobart's yards and with thousands of vehicles declared total losses almost overnight.

40:14And in those moments, insurance depend on Cobart's footprint to store and auction those cars quickly. And of course, those same events also pose major operational challenges. And we talked about them before, flooded storage yards, stretched towing networks, and sudden capacity bottlenecks caused by just huge upfront costs that Copa has to face. But still, Copa has proven resilient in the past, and just by its exposure to extreme weather, I think we will only see more of those weather and just climate catastrophes. And those changes drive more frequent and more severe catastrophic events, and in turn, also more total costs, which should be a tailwind going forward.

40:55I think that's a really interesting point because it would be kind of easy just to think of this thesis as really being primarily about car crashes. But no, I mean, as you said, the weather is there's many different ways that vehicles can be damaged and weather is a part of that. And with there being really this increasing pattern of extreme weather globally, that's expected to continue to get more extreme in the coming years. And we've seen that with, you know, insurance premiums for properties near the water, stuff like that. I mean, there's a lot of business impact of these weather events. And obviously with Copart, they are standing to potentially benefit from that, but, you know, at a minimum be impacted.

41:40So I think more important than just helping out insurers, what Copart is really doing is they're helping cities and states restore streets and roads and these areas that have been maybe flooded and numbers of cars have been damaged. And they're kind of a partner with these municipalities and getting things cleaned up after a bad storm. I think that's a huge part of why corporate will become more relevant for cities and states and just helping with such events. I mean, after Hurricane Ian in 2022, for instance, the company mobilized emergency leases. They brought in trucks and they stored and remarketed tens of thousands of vehicles.

42:20I think the number was 70 ,000. A response which management has actually highlighted as proof of its resilience. And the science and the insurance data, as you basically already said, they both show a clear trend toward more frequent and more severe weather events. And that basically means more catastrophic total losses. And that both adds volatility to co-parts volumes. But over time, it just reinforces their role as a critical partner for insurers, lenders, and then again, also policyholders. And while I hope we see as few of those events as possible, of course, it's not unlikely this will become a more significant driver of volume in the future.

42:55and potentially even containing the impact of AVs, at least to some extent. And speaking of AVs and also the Uber Eats that you mentioned, this is really where we need to circle back to the idea of terminal value. We did that in some other pitches, and I think it's pretty important here. And to be clear, I don't think AVs is something that we're going to hit anytime soon. It's going to take many, many years before autonomous vehicles make up a meaningful share of the new car sales, and even longer before they place the existing fleet. I mean, on average, cars stay on the road for about 15 years before they are swapped out.

43:29So even if we reach the point where AVs are the majority of newly sold cars, you would still be looking at another, let's say, 15 years before they dominate the fleet. And that said, even during the transition, the impact would already show up in falling salvage values and lower volumes. At least that's what we have to imagine now, looking at the amount of accidents that Waymos, for example, have, which is not a lot. So yes, I would say AVs are still a long time out, but they're definitely the most important thing to keep in mind when thinking about Copart's terminal value. As for Uber, I actually think that's a risk that might be a bit overblown or overstated.

44:06And we're both bullish on Uber as a business, but it's worth mentioning or remembering that we've seen massive improvements in public transport and bus and train system and taxi availability and now with ride hailing as well. And yet, despite all of that, miles traveled and costs in the U.S. have actually quadrupled since the 1960s. So from an environmental perspective, it will probably be better if the trend finally slowed down. But if we're being honest, that feels like more wishful thinking than something we can actually realistically expect. I think there's another angle here that's worth considering, too.

44:39And that is that Copart sells a large share of its vehicles overseas, often into countries with maybe not the same level of infrastructure or tech adoption as the US or Europe, which means you could argue that those volumes are actually more environmentally friendly than producing brand new cars to have the used cars sent there. And so realistically, that's probably also where Copart would continue to move its inventories once autonomous vehicles become more common in U.S. and on European roads. With the point being, just because we see lots of adoptions of autonomous vehicles in five or six years, let's say, in L.A., San Francisco, Austin, and New York, it could be many, many years, if not decades, before that sort of adoption is matched in many other parts of the world.

45:31which doesn't mean that Copart's business will last forever, but the ice cube may not be shrinking as quickly as some people would think. And you mentioned earlier that total loss frequency is really the main driver of Copart's volumes. And, you know, well, with cars becoming more complex and more expensive to repair, especially as they get strapped up with all this autonomous vehicle technology, that total loss rate could actually rise significantly compared to today, even with fewer crashes, meaning the threshold for a car being totaled could actually be a lot lower in terms of the amount of physical damage to the vehicle.

46:09Because if those really expensive sensors get thrown off, I would imagine that is costly to replace. And then the calculus of whether a car is totaled begins to shift very dramatically. That's really a main point if you think about the thesis for investing into Copart. You already see it in the numbers. And if you just look at a Waymo car as an example. I mean, the cost is somewhere between$150 ,000 and$200 ,000 and it's packed with sensors, right? A dozen cameras, six radar units, and another four LiDAR sensors. So no matter where an accident hits, you're almost guaranteed to damage one of those.

46:44And the repair for that, I mean, that bill would probably be in the tens of thousands immediately. So sure, Tesla is showing you that you might not need that much hardware to make an autonomous car work, but I think you get the point. The technology itself is expensive and it's fragile. And another thing to keep in mind is that despite all the safety improvements of the last 30 years, airbags, anti-lock braking systems, and lane assistance, you name it, the absolute number of accidents has actually only fallen by about 8%. I think intuitively, I would have said significantly more, but it doesn't seem to really move the needle.

47:16Autonomous driving is obviously a way bigger leap than any of those earlier features. But when I put all the pieces together, more total losses whenever an accident does happen, the fact that adoption would likely take 30 plus years to work through the fleet, and the reality that past safety features barely dented accident numbers, I don't see AVs yet as thesis-breaking for Copart. I think I agree with you. It's probably not thesis-breaking at this point in time, but of course the market never wants to see really any kind of uncertainty around a company's core business like this. And so there is going to be a punishment for this kind of lingering shadow that is sitting over the future of Copart's operations.

48:03And so I'm actually surprised to see that the company trades at such a premium multiple still, even after selling off, given how there are some of these big picture questions about the future of mobility and vehicle ownership. And as we just keep moving along here, to kind of summarize a little bit, you know, we've already gone through how Copart generates its revenues. We haven't really touched on the cost side of things yet, or whether there are many particular metrics or areas that as investors or potential investors, you would say we should be paying close attention to when we're analyzing Copart.

48:39So there are actually some interesting things when you look at Copart's cost structure. You might remember that I mentioned earlier that the costs of their yards are capitalized, meaning they don't show up on the income statement, but instead they sit on the balance sheet. And that has the effect of artificially boosting margins compared to other businesses, especially IAA. And it's a similar story with most of the upfront costs tied to just processing cars. So things like towing or just doing small repairs before you can actually sell that car, all those costs also get capitalized. capitalized.

49:11And if you look at Copart's 10K, for example, you will see that they roll them into inventory as well under a title called vehicle pooling costs. Beside those little quirks, you just have a business that just doesn't stop compounding. A 15 % revenue CAGR over the last 10 years and over 21 % for earnings per share. And the good news is that growth hasn't really slowed down in recent years, although the business obviously got way bigger. When we look at the CAGR of just the last five years, revenue grew even slightly faster at 16%. And while EPS only grew in the high teens, a single large share repurchase could push the CAGR higher again here as well.

49:48So the returns on invested capital that Copart earns, they are just a dream for every investor consistently in the mid to high 20s. In recent years, there has been a downward trend. And generally, that's something we don't want to see. However, in Copart's case, that's just due to their investments in more yachts, which is an investment that has always paid off tremendously in the years and the decades earlier. And in the graphic that you can see on YouTube and Spotify, now on your screens, I'll add the CapEx spend over the return on invested capital figure, just to show the relationship between both.

50:18And when Copart buys new yachts, CapEx goes up, obviously, and return on invested capital in the short term goes down. It just takes a while until yachts are running on full capacity. But when that happens, operating profits will outpace invested capital, and that will increase return on invested capital again. And it's also part of why the margins should reaccelerate in the years ahead. Well, just since we're talking about the CapEx side of the business, you did mention how the free cash flow margin is honestly more important than just looking at the operating or net income margins due to Copart capitalizing a lot of its expenses.

50:53So how does it generally look for free cash flows? What is the conversion compared to net income? Well, it's difficult to say that you have a normalized conversion because it's fluctuating a lot from year to year. When you look at the years where the conversion is lower, you mostly see an increase in receivables and most importantly, higher vehicle pooling costs. So all the costs before Copart can actually auction out a car. So let's say you have a hurricane and thousands of cars are totaled at once. Well, then Copart has to pay a lot of money up front for towing, overtime for workers, and possibly even renting additional space to store all the vehicles.

51:30And from a pure Wall Street perspective, it might even be smarter at times to just not take on all those vehicles. But that's something Copart wouldn't do. IA did that in the past and it hurt them in terms of market share. And they also see themselves and they, I mean, Copart as a helper in times of emergency. We discussed it. They want to clean up the streets, remove all those total cars from the city. And it's part of what they stand for and what they think is the mission of the company, basically. Yeah, I can imagine that also pays dividends. when you think about their relationship with insurers.

52:00They always know that in times of crisis, Copart won't back out and they'll actually be there to help get the situation under control. And what I really like to see is that Copart's long-term thinking that they have and just the trust and the overall culture, that has survived across generations. Willis Johnson founded the company and he is still involved as chairman, but Copart has already seen two CEO changes since then. So you had Jay Adair take over from Willis in 2010 and lead the businesses as CEO for 12 years. And he had worked with Willis for decades by that time. So it's not surprising that he would make sure that the culture continues to persist.

52:39But even now with Jeff Liao as CEO, Copart continues with the exact same philosophy. Might only be me, but I personally get Berkshire vibes just hearing that. No, I think you're right. And we just love to see that kind of thing. It's just so special and it's so uncommon to anyone who doesn't believe us. I mean, seriously, it is incredibly uncommon in corporate America to find these kind of things. So when you see it and you have a company that's already doing so well and has such a great track record, that just makes the investment so much more interesting. And so we've looked at many companies by now.

53:17And like I said, you just really start to appreciate the importance of the management team. I think it's something that kind of beginning investors don't know to pay attention to or don't know how to pay attention to it. But one of the key themes that I have seen as I've spent more and more time studying companies and learning from great investors is really this message that the management team matters a lot. And culture is one of the few things that you can, at least to some extent, really try to guarantee that the successor will do a good job of maintaining. And so with Copart, I don't think there's a ton of key man risk with this exceptional culture that's in place.

53:57You could probably say the same for Berkshire Hathaway with Greg Abel taking over for Buffett. It's not like the company's identity is going to dramatically change with Buffett gone. And so, of course, I mean, there are always things that Copart is maybe not doing that Wall Street and some other investors would like to see, but that is just how it is. And I think on the capital allocation front, that's maybe where people have been more critical. Yeah, Copad is not doing anything because WallStreet wants to see it. In terms of capital allocation, Copad doesn't pay a dividend and it buys back stock, but it only does so when it thinks that Copad is really trading at a cheap valuation.

54:32I'm not talking about expecting 10 % returns per year. We're really talking about a steep discount in the stock price, which might not be a good thing for us because they haven't bought back shares since 2020. And the last meaningful share we purchased actually only happened in 2016 and in 2019. In the graphic currently displayed on the screen, I've overlaid Copart's buybacks and the stock's PE. And you can't see it perfectly here because the annualized PE is a bit higher than the points where the buybacks actually happened at the time. But I think the trend is visible. So Copart buys back stock at PEs in the high teens or in the 20s.

55:06Currently, the stock is trading at a PE of around 30. And in the last two years, it actually traded closer to a PE of 40. The point being that Copart's buybacks seem to be a pretty good proxy for an under or over valuation of the stock. And although the management also says that they consider buying more land to be more value accretive long term. And just by Copart's RIC, I have to agree. If Copart can achieve 25 % returns on invested capital into new yards, that's the opportunity cost for doing buybacks instead. So the fact that we're not seeing buybacks, I think it doesn't mean that management thinks the stock won't have good returns.

55:41It just means that the returns at these prices don't look as attractive as just buying more land. And that's exactly what you want to see. A business that has enough opportunities to deploy capital at high rates of return, that is ideal. And this has worked for Copart for decades. And I think there are no signs of that slowing down. And as you've told me before, management is still viewing buybacks as really the number one way to return capital to shareholders. So I assume that really they're just waiting for times when the stock is really seriously underpriced. And it seems like that is what they've done in the past.

56:15And the other thing we like to see is that insider ownership is very high too. Willis Johnson still owns$2.8 billion worth of shares. So that's more than 5 % of the company. And Jason Adair owns another 2.5 % of Copart. And then combined, the other insider ownership from the executive team stands at over 8%. So that is very substantial. What might even be a better example of just how the culture is important to Copart and how aligned the management is with shareholders is the executive pay structure. Executive chairman and former CEO Jason Adair is famously just paid$1. He gets no cash bonus and he has declined any new equity since 2020.

56:532020. Wallace Johnson is compensated like every other outside director too with a modest cash retainer of$57 ,500 and a standard annual stock option grant worth about$250 ,000 for the founder of a company that's now worth well over$40 billion. Now let's say that's not a lot. And these stock options, they're also front loaded, which means that they run over multiple years, they cannot be renegotiated in between and you only get them when you actually stay with the company long enough. Johnson's option term for example is seven years and all of the options are also tied to price hurdles so if the stock doesn't perform they can also not be exercised.

57:32In Copart's case the stock must trade at 125 % or more off this direct price for 20 consecutive trading days only then the option can be exercised and with that you just eliminate the risk of having a huge skyrocket price for let's say five days up on good earnings because you just polish them in a certain way and then you can access your options that's not possible under this plan and the current CEO Jeffrey Law has also a base salary of$900 ,000 which is significantly higher but let's be honest it's still very low for a company as I said worth 40 to 50 billion dollars and his options otherwise have the same structure as Johnson and Adair's and I don't know it's just a structure that personally I like to see as a shareholder.

58:16However, on a more negative note, insider trading tells similar story to the buybacks. We haven't seen any insider buys in a while. And compared to the insider stakes a couple of years ago, we've seen actually three to 4 % decreases overall, which is quite significant. And both Willis Johnson and also Jason Adair sold shares. And to be fair, InsetEx and Salesforce for many reasons. And I think in Jason Adair's case, those were mostly scheduled sales. So I wouldn't overstate this, but the fact they're not buying does show that corporate is probably not a huge bargain right now. I really like that way that they hedge against, you know, there's so many famous corporate case studies of the CEO of a company having their bonus set to, you know, the stock being at a certain price at a moment in time.

59:02And, you know, without getting deep into accounting, there are a lot of things that heads of companies can do to cheat earnings and kind of manipulate things to look better in the short term. And you can't do that forever. But if you want to beat one specific earnings target to make the stock pop, so you unlock a balance, that is actually very possible to do. And so the way they hedge against that, I think is very interesting in making sure that no, management actually has to sustain appreciation in the underlying value of the stock over time for those bonuses to be unlocked. And so it really does seem similar to the Buffett playbook we've seen at Berkshire, at least in terms of the buybacks that they do.

59:48And a couple of weeks ago, we talked about Berkshire a lot because we pitched them for the portfolio. And with over$4.8 billion in cash, that is some serious ammunition for buybacks when management thinks the time is right. So I kind of get excited about that, just thinking, okay, hey, at some point, Mr. Market is going to give a more attractive price on this stock. And they've got a lot of pent up dollars that can go toward creating value for shareholders by purchasing stock at relatively discounted prices. And they're probably the best judges of what the company's actual intrinsic value is. But maybe we'll see them do an acquisition instead of buybacks.

1:00:29But either way, it's easy to have a lot of faith in this management team and their ability to figure out the optimal places to allocate capital. And so I did want to just linger on that point on acquisitions though, because you have mentioned that it's something they've used in the past to expand their businesses. So maybe you can talk more about that and really where we are at with that process and just generally the growth drivers and opportunities for growth in the future for Copart. If there's one thing I'm really not concerned with when I think about investing in Copart, it's the capital allocation of the company.

1:01:01There's some companies when I see they have$5 billion in cash sitting around, I'm kind of asking myself, what are they doing with it? Is this even cash that I should maybe even discount when I do a valuation? That's not the case with Copart at all. We already discussed the two big acquisitions of the 90s, which were North Texas Salvage Pool, which was the US's largest salvage seller, and NER Auction Group, which added roughly 20 additional salvage facilities and basically back then doubled Copart's processing volume overnight. And as Copart moved to international markets, it continued to use acquisitions to get a foot into these markets.

1:01:34In 2018, for example, Copart acquired a Finnish salvage company whose pronunciation I would undoubtedly butcher, which is why we will go with the acronym AVK. And it was a small, basically tiny acquisition. It was less than$10 million, but it's an example of just how Copart uses strategic acquisitions to find its way into those foreign markets. And beyond geographical expansion, Copart also diversifies into other verticals. It acquired national power sport auctions in 2017, which mostly focuses on motorbikes. And more or less recently, it bought a majority stake of 80 % in Purple Wave. And that move extended Copart's auction model into construction, agriculture, and also fleet equipment.

1:02:16That is really one way to hedge the risk of autonomous vehicles is by moving away from cars a little bit. And, you know, whether it's jet skis or John Deere tractors, looking at all types of vehicular equipment or sporting gear. And so, you know, basically they're onboarding more verticals that may or may not be less prone to being replaced by self-driving cars, basically. I'm just pretty confident we will see more such acquisitions over time. But again, it's not like I consider Copa's business model to be under immediate threat. In the Reese Sterling's call, management said that the current cash position shouldn't be seen as piling up cash for possible MMA.

1:02:58If an opportunity comes, they will take it, but they are not waiting for one. The strategy for acquisitions is to only buy companies where they would feel confident in buying the business also as a standalone company. and then they think about, okay, where are the synergies that might make sense for Copart. And if a company checks both of those boxes, then Copart will acquire it if they can at the right price. Otherwise, they will just focus on growing the business the same way they did before for decades by now and maybe a little more focus on the international markets. Although the numbers make concentration on the U.S.

1:03:30look more severe than it actually is. All the sales that originate from the U.S., for example, they are counted as U.S. revenue. although 40 % of those vehicle sales actually come from the US but they go to international customers. So the vehicle sales business overall is more 50-50 between international and then between US markets but the majority of Copart's service business still comes from the US. But if everything goes right in international markets I would say we could see a shift where Copart then changes to the service model in international markets too and to some extent we already do see that.

1:04:04And international growth is needed. If we assume that Copart's US market share is about 50%, well then the market could be estimated at around$10 billion annually, which is not that much. And while Copart will continue to take market share here and there, we know that this will not become a monopoly as we discussed before. So I think it's fair to say that the US market is mature and most of the growth still sits in international markets. And Corporate is already operating in places like the UK, Germany, Spain, Brazil, Ireland, and Finland, as we discussed. And while the fact that they first have to prove to international insurers that their model works means that they are pioneers in those markets, you could also argue that it comes with certain risks and difficulties that they're just not facing anymore in the US.

1:04:48The first one that comes to my mind is that they do not have the same footprint of yards in those countries. Although I must say, I was surprised by the number of locations they already do own. In the UK, for example, they own 20 yards. In Germany, it's nine, 10 in Spain. I think it's over 30 yards in Finland, mostly due to the acquisition they made. And according to Copa itself, it's the biggest player in the UK, Brazil, and the Gulf states. So they're really, by now, probably more of an international company than just a US-American junkyard. And so what about the non-insurance side of the business here?

1:05:21I know insurance companies will always be at the core of Copart's business, but it does seem like the company has steadily been broadening its base. You've got rental fleets, dealer trade-ins, finance companies, banks, and even individuals that are increasingly feeding vehicles into Copart's ecosystem. And in the U.S. wholesale auto market, something like 17 million vehicles change hands every year, which is several multiples of the insurance salvage market. So even if Copart only captures a sliver of that volume, the opportunity seems like it dwarfs their current addressable market. That's a huge opportunity, which is why Copart has been steadily expanding beyond its core insurance salvage business.

1:06:06With its business arm, which they call Blue Car, and Blue Car focuses on whole cars from banks and finance companies, dealers, rental fleets, and even individuals can actually sell their car through its Cash for Cars brand that Copart owns. And by pulling in used cars, blue car feeds them into the same auction system that insurance companies or cars also run through. And that just means they immediately tap into Copart's huge global buyer base. In 2021, for example, more than 20 % of vehicles sold came from non-insurance companies. And since then, that segment has grown faster than the core segment, which means that in fiscal year 2025, blue car has not only grown 15%, which is faster than the core segment.

1:06:46And Copart also says that the share in general, without actually giving us the details on the numbers, should have increased significantly since 2021. Well, I think it's that time where we go and maybe take a look at trying to think through the valuation here. And I feel like it would be hard to listen to this conversation and not think that Copart is a phenomenal business or at least a very good one. in that if we can buy it at the right price, of course, it would be a great addition to our intrinsic value portfolio that we're building every week on this show over time. I would say a common theme in our portfolio holdings, though, is that the market is not seeing the business necessarily through the same lens that we do, meaning we have a different opinion, maybe a contrarian opinion, where we feel like we're able to buy a company at a discount to its intrinsic value.

1:07:40But in this case, the market is pretty clearly in agreement with us. It's not a secret that Copart is a great business. And the question is, what is a fair price for such a great business and whether we're even beyond that threshold? So how does that look? Is Copart fairly priced? Is it at a level where it is still attractive to us? Well, it's funny because we started our pitch saying this business is so boring and the entire industry is and this is often used for you know as an excuse to say you can find businesses here that are cheap because the market overlooks them but if we're being honest Copart hasn't been overlooked in decades now you see a few companies with a growth chart across all metrics you look at it's just as beautiful and as predictable as with Copart revenue profits EPS cash flows everything is growing year in and out and Wall Street loves predictability so it's not a surprise that you have to pay for that.

1:08:37Cobart is not the type of business that will suddenly start growing the top line by let's say 20%. Low and stable double digit returns are what I would personally expect from Cobart going forward and Willis Johnson actually once said I learned an important lesson and that was not to grow too fast. You will have to grow slow and steady. Wall Street makes you pay for it. They always compare you to last time. And if I just look at their stock chart and also at the financials, he's completely right. And it seemed like he lived by that lesson. What that means for us though, is that we don't really have to walk through a bull, a bear, and then a base case like we usually do.

1:09:11I don't see a world in which Copart in the next five years will only go by 5 % per year. And as I said, I also don't see a world where they would go by 20%. So in my model, I estimated an 11 % growth rate for the service revenue and 1 % for the vehicle revenue. And you might ask why only 1 % for vehicles when in the last five years this has grown by an average of about 30 percent. Well because 2021 and 2022 as we discussed earlier there were total outliers in which the segment basically grew 60 percent per year because of the higher used car prices. Corporate focused on this segment intentionally and increased volume in that space but since then the segment has been pretty much flat and half of its business comes from the international markets where as we discussed The long-term goal is to switch from the vehicle sales to the service model.

1:09:59So Copart's margins have seen similar improvements to the rest of the financial metrics with a slight decrease over the last three years, similar to what we've seen with the returns on invested capital, primarily due to CapEx investment. So while the land doesn't hit the PL, the buildings, the equipment, and basically all of that stuff shows up on the PL in the form of depreciation at some point. And that point is pretty much there now. So the recent quarter, Copart's margins have already been improved significantly with the switch from the purchase to the service model in international markets and especially Germany caused international gross margins to rise by a thousand basis points from 25 % to 35%.

1:10:39And I'm pretty confident we will see further margin improvement in the years ahead. So I personally see Copart hitting, let's say, 41 % operating margins in 2029. it. But I don't forecast more than five years. We basically never do that because it's just a time frame that would be too hard to estimate for us. I do suspect that operating leverage will increase beyond 2029 and probably increase margins even further. So where does it all leave us? Like at the time of recording, the stock is currently priced at almost$50 a share and there's a forward PE of 30 implied there. So do you expect it to continue to trade at this kind of premium in your model?

1:11:20I know that if we look at Copart's valuation history, it is trading at a slight discount to the median PE of 33 that it's really traded at since 2016. Well, Copart is a premium stock, but we have recently seen with TradeDesk, for example, what can happen to companies that trade at premium multiples when they can't perform in line with the market's expectations. So Copart is a much more stable business, but even here we've seen a contraction in the multiple from 45 from last year to just 30 now. So this is a long way of saying that the implied exit multiple in my model is 126. At a discount rate of 8%, this leaves us the fair value in the low 40s.

1:12:03And if you want to put a margin of safety on that, I used a 10 % discount on my end. The fair value estimate would be somewhere in the high 30s. So right now, Copart is not yet what I would call a no-brainer. I know that many believe you have to pay up for good companies. And if you are an owner of Copart stock, and potentially even sitting on larger gains, I can completely understand why you would hold on. And returns will probably be just fine. But we know how fast stocks can sell off. So for us, Sean, I think I would suggest waiting for such a sell-off with Copart. In the high 30s, I would make this probably a 5 % position or larger immediately.

1:12:39Right now, you could make a case for a small position and say 2 % and then double down if it goes down further. But it could be an opportunity cost for a while. In just the last three years, we've seen the stock swing from something like less than $27 per share to as high as$63.43. I think that was the exact peak that I can see on the chart right now. So, I mean, there's definitely some volatility to be taken advantage of here, even for a company that's had quality as this. and I think we're at a threshold now where copart shares are probably just starting to get interesting and maybe depending on your level of conviction in the business you may or may not begin to find them compelling at these levels and like you said though Daniel for us to initiate a new position from scratch we'd really need to feel confident that this stock can not only outperform the market but also our other portfolio of bets that we could be reallocating cash towards and And when you have such a rich multiple here, all it really takes is one disappointing quarter for the stock to fall 20%.

1:13:39And in the long term, even that doesn't really matter all that much to the underlying business if it keeps growing steadily. But still, it's hard to get too excited about the stock at current prices when it can sell off pretty meaningfully and still be at a considerable premium to the S &P 500, which is a collection of some pretty good companies too. And so that is really not at all what we would call a margin of safety. And we've seen the stock fall between 15 % and 20 % year to date, which is nice. But I think we need to get another move of that magnitude to the downside before I would start to feel really good about starting a position in the company.

1:14:17And otherwise, it's one of those where I'd say, hey, it's probably a good bet. I don't judge anybody for buying it. But at the same time, I don't mind being patient. And it's not so obviously a good bet that I feel like I have to roll the dice. I totally agree. I think it feels somewhat like a cop-out when we say, okay, we need another 10 to 20 % drop. But Copad has done something in the last two quarters that it has never done before. And that's disappointing. So as you said, Sean, I think there's a good chance we will be able to pick it up at a lower price point at some point. And for the listeners, we might say this a lot, but I would personally argue that we are as close to establishing a position as with a few other companies that we looked at.

1:14:56And I would honestly be surprised if Copa does not end up in our portfolio at some point. But as you said, we do pay a lot of attention to price. So for now, it's on the watch list. All right. With that, how about we end today's episode and you give us the hints for the next one? Yeah. So next week, I'll be making my pitch for a company to add to the intrinsic value portfolio. And you can tell me whether it's overvalued or not, whether you want to add it, but it is going to be another high moat compounder next week. And it's actually a company that's very deeply ingrained in the financial market, I would say, but it is not a payments business.

1:15:34As some listeners will know, I have a bit of a love-hate relationship with payments companies. So their business model is really more akin to collecting passive royalties for the products slash services that they provide. And really they're mainly providing this service to asset managers who rely on what they do to run their mutual funds and ETFs. And so, I don't know, as always, I kind of feel like that's giving a lot away, but it's just a last hint. They're particularly well known for their role in international stock markets. So that's all I'll give away for now, but it'll be another pretty interesting discussion and another just really incredible business where we try to figure out if the price today is fair.

1:16:20That sounds good to me. And I still think I have to wait for the day when Sean actually brings a payment company to us and pitches one. All right, I will leave you all with a quote from, of course, Willis Johnson. He said, be your customer's most valuable partner. I think it's fair to say that Cobot has been that for decades. And I would be more than surprised if that changes over the next decades. And if they continue to be it, it's probably going to be a good investment. And with that, have a good one. See you all next Sunday.

1:16:53Thank you.