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2Q26 Update.
Copart reported fiscal 2Q26 and the stock sold off -3% the next day, after recovering from being down -10%.
The quarter was bad with revenues down -4% y/y, gross profits down -6% y/y, and U.S. insurance units declining -11% y/y.
While there is no doubt that this was poor performance, it wasn’t quite as bad as it looked after you back out the CAT event in their comp period.
Backing out the CAT event, global gross profits were +0.4% y/y and U.S. insurance units were down -4.8%. While the contraction in U.S. insurance volumes is particularly bad, the reasons they attribute to it are unchanged from the past few quarters.
The fact that they clarified they didn’t lose any accounts and that their ASPs have increased again (U.S. insurance ASPs +6% y/y), does support management’s claims that the volumes losses are from a higher portion of drivers going underinsured and that volumes on the carrier side is driving their poor performance (Progressive in particular is rumored have been gaining share and is an IAA customer).
However, it should also be mentioned that this comes alongside some claims that IAA has stepped up their game and improved their operations. In particular, reducing the amount of time it takes a car to go from picked up to sold has become more competitive with Copart. For years Copart has benefited from IAA’s relatively worse-run operations, which helped push more wins to them. Going forward, it looks like that will no longer be the case.
An AlphaSense expert call with a former VP of Geico said “The last data point I had about three months ago was they were neck and neck. They were both at around 52 days, and they had dramatic improvements”.
While the fear is that these volume losses were the result of IAA becoming a better run business, that thesis doesn’t hold water. There have been no carrier losses and contract renewals are every several years. Unless you believe Jeff Liaw is being misleading saying there have been “no accounts” lost, but not specifying that an account could have lost volumes, it doesn’t seem like IAA’s improved business is the result of volume losses. Nevertheless, this could weigh on future RFPs contracts.
Having said all of that, a competitor catching up, doesn’t mean they will lose volumes. The industry wants a duopoly and so has been more willing to help IAA to stabilize the competitive balance, but that is only to a point. They don’t want IAA to be dominant either, and it still is likely that Copart’s operations are faster to turn cars and could possibly offer slightly higher returns because of their better auction liquidity from more global buyers (although that point is also contended).
In terms of potential future price competition, Jeff Liaw had this to say:
You can read our last update for more on this and the dynamics driving the volume losses.
In short, it is a negative, but is likely a cyclical phenomenon and not secular. But competition intensity in the U.S. is picking up. To the positive, international gross profits for this fiscal year are up 10% y/y and they have a more benign competitive environment in those markets.
Valuation.
At a $34 stock price, Copart trades at 21x trailing earnings or 20x FCF. However, a lot of their $393mn in capex is for growth and we estimate with normalized FCF they trade at around 18x. Their valuation over the last quarter was low enough that Copart felt comfortable restarting their buyback program. They bought back $500mn in stock, their most meaningful purchase since 2019 when they bought $365mn. It is worth highlighting they have over $5bn on the balance sheet currently.
In order to see what assumptions an investor needs to make in order to get a return, we turn to our reverse DCF.
Below are the growth rates our DCF sensitizes around.
Then we vary our revenues with three different margin scenarios, shown below.
The outputs of the reverse DCF are shown below.
*At the time of this writing, one or more contributors to this report has a position in CPRT. Furthermore, accounts one or more contributors advise on may also have a position in CPRT. This may change without notice.