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4Q26 Update.
Copart reported fiscal 4Q26 earnings and the stock sold off-2% the next day, but has since recovered. This was the first earnings call after Jay Adair returned as CEO at the end of June.
The quarter was pretty meh as revenues grew just +2.4% y/y and gross profits were -5.5%. The past few quarters represent rare negative growth for the business. Outside of Covid, revenue growth has only dipped negative in 2015 and 2009. While there certainly is a level of cyclicality to revenues, the base in the past has tended to be higher. Ignoring Covid, which provided abnormally strong growth (after 2 quarters of negative growth), Copart continued to put up strong numbers until around the middle of 2025.
As we noted in prior updates, management attributed these current revenue headwinds to more drivers going with less insurance or no insurance at all. In these circumstances, if a car is totaled the insurance company wouldn’t be on the hook for it and so it meant less supply for Copart. (Industry stats do broadly corroborate this). The other reason they mentioned was that the market share among insurance companies had been changing in favor of insurance businesses who used IAA more than Copart. While this made sense, investors were worried that IAA had been improving their service levels, driving insurers to leave Copart in favor of IAA.
Jay Adair is dismissive of this on the Special call saying: “I think they’ve [IAA/ Ritchie Bros] espoused some rhetoric that’s out there in the marketplace. I haven’t seen where their products have dramatically changed”.
U.S. insurance volumes fell -7.5% this quarter, which is down from -4.2% last quarter and represents the 6th consecutive quarter of shrinking volumes. This larger volume loss was driven by 1 single customer loss, which they believe was very idiosyncratic and specific to that customer. On the Special call they alluded to the fact that they weren’t willing to offer the pricing that they demanded. Outside of that one customer loss insurance assignments would have been +2.3%, showing that their underlying growth is positive once they lap this customer loss.
Total units were negative -2.9%, as international was a strong contributor at +11.2%. This is not to say they are happy with this performance. In our opinion one of the main reasons Jay Adair is back is to return Copart back to real growth.
Operating profits fell -11% y/y to $369mn due to higher expenses in yard operations, and investments in their long-haul delivery service expansion, Title Express, and their wholesale facilities. CFO Leah Stearns stated that these costs were largely discretionary and driven at longer-term growth. To the negative, OpEx per car in 4Q26 rose 13% y/y. The volume headwind is certainly one aspect of this, as fewer cars means fewer units to spread cost across. While they didn’t mention any clear timeline on when this cost will come down, they state that as volume increases and they embed more technology throughout the company (including AI) the cost should come down. Jay Adair is not big on guidance and is more of a “let-me-show-you” manager. This does require trust on behalf of investors though.
While we mentioned that Copart attributable poor volume performance to underinsured drivers and market share shifts among insurers, this was the first call in the last few quarters when they didn’t cite that as a reason why the U.S. insurance business was suffering. But Jay Adair did take a moment on the call to state that if a competitor was to cut price that was because they couldn’t deliver competitive returns to Copart (returns here means the % of the car’s pre-accident value that is recovered). Copart doesn’t see a need to be competitive on price.
U.S. insurance ASPs grew 3.7% y/y in the quarter, which helped offset the volume declines. The international business, as mentioned, was a bright spot with international insurance units up 11.2% y/y, with fee units increasing 11.5% y/y primarily driven by their UK and Canadian operations. They also noted that they are now profitable in all of their international markets. With experience in how to attack these international markets, which often operate differently than the U.S., they are going to continue to invest in these markets and are looking to expand into new ones as well.
With over $5bn in cash on their balance sheet at the beginning of the year, they had ample room to aggressively buy back shares and cash-fund acquisitions. For the full fiscal year, they bought back $1.6bn of shares. Last quarter alone they repurchased $1.4bn in stock. This quarter though they shifted capital allocation priorities to the acquisition of ACV.
Jay Adair alluded to acquisition opportunities to stoke growth on the last call. We are mixed about this. While a good acquisition at the right price can certainly help them grow (more on ACV below), it also suggests a limiting of growth opportunities in their core business.
They announced a tender offer for ACV at a value of $1.9bn. ACV is the largest digital automotive marketplace in the United States with over $10bn in GMV in 2025, >22,000 active buyers, and selling over 800,000 vehicles each year, all without any land of their own. The idea is that ACV will help them penetrate more franchised dealers (improving auction liquidity) and help them get more into whole car.
This is a bit ironic of a turn of events because if we rewind to 2005/06, Copart entered the whole car business with Motor Auction Group, but ultimately decided that the opportunity and returns in their core salvage auction business were better. Over the past few years though they have been pushing more into whole car and attracting higher end units (higher end here is relative to literal salvaged vehicles). In the past few updates, we predicted that Copart’s real growth opportunity would be to continue to move up into whole car as it provides them a new avenue to grow volumes and they carry higher ASPs. Although, it is a much more competitive business.
The acquisition makes sense for Copart, but it does suggest that their domestic insurance operation is perhaps more mature than they want to openly admit. Jay Adair coming back to help Copart grow more wasn’t just about fixing some operational issues (which it does sound like there were some, noted below), but rather about Copart pushing into their next chapter.
ACV has messy financials with a ~$55mn operating loss over the past 12 months and negative ~$35mn in operating cash flow after subtracting SBC out, so Copart will need to find meaningful synergies.
The slide below notes that salvage vehicle auctions see around ~5mn in annual volume from the U.S. whereas used vehicle transactions are about 4x larger at 20mn (but much more competitive too).
The advantages of bringing these two platforms together are outlined in the slide below.
Jay Adair said more about combining these two companies together on the call:
While Copart positioned the CEO transition as being primarily about jump starting growth, there are signs that they were having some operational issues as well. Admittedly, we found this surprising as Liaw seemed on top of it during earnings calls and they still had founder involvement. No doubt the need to find new growth opportunities for Copart was a big reason that Jay came back, but it also looks like the culture of Copart was degrading under Liaw. An AlphaSense expert call transcript from a GM of Copart of 15 years surfaces some operational issues. In short, it seems that Liaw wasn’t a great operator. He 1) rolled out a lot of tracking metrics that the yard GMs resented and increased scrutiny with more audits, 2) was a bit of a micro manager, which demotivates employees, and 3) they lost talent in part due to poor pay. Under Liaw it seems the desire to make sure everything was working properly had the opposite effect—the reduction in employee autonomy and increased scrutiny combined with middling pay increased employee turnover.
The same expert also noted that Progressive (who is rumored to have shifted material volume from Copart to IAA) was a very demanding account. They were the only insurer that required individual photos of the car’s floor mats for instance (according to the same Copart GM). They also had demanded very short cycle times with 40-50% of vehicles picked up the same day. This together with Jay Adair’s comment that in some ways they didn’t want the business they lost, suggests that Progressive may have been too demanding on both service and price and Copart felt that business wasn’t worth continuing with. However, it’s also worth noting that the same Copart GM noted that in his tenure that Progressive switched from IAA to Copart and now back to IAA, feeling that there is a bit of a rotating nature to some of the accounts (remember this isn’t for the full account, but just his individual yard he is referring to).
Separate from Progressive’s high service level demands, it seems like things were slipping through the cracks at Copart. Most yards didn’t have EV chargers for instance and so those vehicles had to be marked as “non-runs” because they didn’t know if they worked or not. The Copart GM recalled how one buyer loved buying EVs from a particular yard because they almost always worked, which basically means that the buyer significantly underpaid and the insurance company got shortchanged.
This expert also mentioned a new competitor in Salvato Auto Auctions, who has a “disrupted” model in that they basically rely on 3rd parties for everything and have the subhaulers take photos. Salvato is primarily trying to win business on price. We do not believe it is a very formidable threat because without owning land, vehicle storage costs will be higher and you cannot have a CAT response, which is key for big insurers. Salvato does discount the buyer fees, which theoretically should mean that the buyer is willing to pay more for the vehicle, which helps push up returns, but without global auction liquidity it is very hard to believe their returns are consistently anywhere near Copart’s (even with the higher fees).
It seems like they might be able to on margin pick up some volume from smaller insurers as an alternative service provider, but we doubt they ever move beyond that. (While we usually talk about the insurance salvage auto business as being a duopoly there have always been other smaller regional players that had some small share).
Overall Copart continues to have a strong moat, but it does seem like it eroded a bit over the past few years with operational shortfalls coming alongside operational improvements at IAA. It also should be clear that with Jay Adair back at Copart and acquiring businesses to look for more growth is a shift in the thesis. No investor who owned the stock a year ago would have thought the business needed the founder to return to fix it, nor that they needed to enter new businesses in order to continue to grow faster. Instead, most of the slowdown was attributable to cyclicality, which is still partially true, but not the full story.
Now a Copart investment thesis has shifted away from relying on Copart’s formidable competitive position and instead relies on Jay Adair’s ability to improve cost structure at the business, improve service levels, and successfully execute on new growth opportunities. While thesis shift is never comfortable and the return of Jay Adair revealed some business issues that weren’t in focus before, it is hard to think it isn’t a net positive having Jay Adair back. The valuation has also materially changed though, with the stock down -35% in the past year and -50% from its 2025 peak. We will now turn to our valuation to see what is priced in.
Valuation.
At a $31 stock price, Copart trades at 20x trailing earnings with a market cap of $28bn. With $4.4bn in cash, that comes out to ~$4.60 a share in cash (before they spend an estimated ~$1.9bn on the ACV acquisition). Backing cash out, they are trading at 17x trailing earnings. Which might be attractive if they can return the company to stable growth. For now though, TTM EPS is down -2% y/y.
We turn to our reverse DCF below to see what assumptions an investor needs to make in order to get a return.
Below are the growth rates our DCF sensitizes around.
Then we vary our revenues with three different margin scenarios as shown below.
The outputs of the reverse DCF are below.
We can see that if Copart can return to mid-single digit growth, then the reverse DCF shows a return of around 10%. If they can enjoy high single digit or low double digit growth for the next 5 years, then results could be much better. Essentially an investor needs to assume some operational improvements and execution of the new growth opportunities to get an above historical market average return here, but even in the low growth scenario the DCF shows a 9% return.
*At the time of this writing, one or more contributors to this report may have a position in stocks mentioned. Furthermore, accounts one or more contributors advise on may also have a position in stocks mentioned. This may change without notice.