Copart Valuation Update

Shares are down by half and the stock is interesting again.

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Disclosure: Long

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Copart is getting interesting again.

I first bought shares in 2018. The business itself grew substantially over the next few years, with a nearly 22% CAGR in net income through 2024. Then the stock price far outpaced the underlying business and traded north of 40x earnings.

I made the decision to sell at a price of $60, implying a market cap of $58.5 billion.

Shares today traded at $33.25, implying a market cap of around $32 billion.

Below are some comments on recent operating performance and capital allocation, and my thoughts on valuation.

Operating Update

• Copart’s Q2 results showed weak comps due to catastrophe events in the prior periods.

• Additionally, the high price of insurance is causing consumers to reduce coverage, increase deductibles, or drop their vehicle insurance altogether. Management views this as a cyclical trend and points to higher average selling prices and strong auction liquidity as offsetting factors.

• Global insurance units fell 9.3% (4.1% excluding CAT) and ASPs increased 6% reported or 7.1% ex. CAT.

• Reported Q2 revenue declined 3.6% to $1.12 billion but increased 1.3% excluding CAT. Operating income declined 8.8% to $388.7 million for the quarter. 

• In the US, insurance units fell 10.7% (4.8% ex. CAT), leading to a 9.5% overall decline in units (4.5% ex. CAT). US operating margin came in at 37.1%.

• International units were down less than 1%, and insurance units fell 2.6% (down 1% ex. CAT). ASPs increased 9%. International operating margin came in at 23.6%.

Total loss frequency in the US was 24.2% in calendar Q4 2025. Management pointed to the longer-term trend and noted that frequency had increased from 15.6% in 2015 to 23.1% for calendar 2025. Here’s updated data from CCC:

• Purple Wave (heavy equipment) transaction volume increased 17% LTM.

Buybacks Resume

The company bought back shares for the first time since 2019, spending $218.2 million to repurchase 5.5 million shares at an average price of $39.82/share. But wait, there’s more…

After quarter end, the company repurchased an additional 24.3 million shares at an average price of $37.11/share for $898.7 million.

Analysts had been badgering the company to repurchase shares for years, and the company resisted (rightly), implying prices weren’t favorable. As a result, cash piled up on the balance sheet, reaching $5.1 billion at the end of Q2. The company has no debt and just $96 million of lease liabilities, so the balance sheet is pristine and primed to take advantage of the stock price decline.

Valuation

Adjusting for the share repurchases after Q2 close, Copart has an enterprise value of $27 billion.

TTM EBIT is $1,684 million, which puts the EV / EBIT multiple at 16.1x.

Viewed another way, after 25% tax, NOPAT is $1,263 million, which translates into a 4.65% earnings yield (21x after-tax earnings). Such a valuation would imply about 5-6% growth to justify. Looking at Copart’s history, that’s a moderate bar to clear.

Here’s how those numbers play out: Copart employs approximately $5 billion of capital in its business (i.e., adjusted for cash). To grow 6% would require $300 million. This also seems like an amount management could reasonably add to the balance sheet, given its recent history. Assuming normalized earnings power of $1.3 billion, the distributable cash flow is $1 billion (growth requires capital, in this case $300 million). With a 10% discount rate and 6% growth, the $1 billion is worth 25x or $25 billlion. Plus the cash of $4 billion = ~$29 billion. If growth is 5%, then the value falls to $25 billion. So the question is all about future growth.

I see potential in several areas:

• Continued frequency gains and a return to normalized insurance coverage

• European margin improvement

• International volume growth could extend the reinvestment runway

• Heavy equipment could expand TAM, though this could come at a lower incremental ROIC, given the need for additional infrastructure

Considering all of the above, I think Copart is selling at a fair price. Management has proven itself capable and shareholder-friendly, always looking decades ahead and building the business for the long term.

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More thoughts? Let me know in a private message or leave a comment.

Stay Rational!

Adam

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