This $5 Billion Niche Market Leader Is A ‘Buy’

A few years ago I bought a Dodge Ram pickup — fire-engine red. It had a Hemi V8 that could have powered an aircraft carrier. It was ridiculously fast. I’d barely have my foot on the gas pedal, and I’d be doing 90. There was no cruise control, a rubber floor — I was lucky the darn thing even had a radio. It got about 12 miles to the gallon. I loved it.

Whoever owned it before me installed some serious exhaust upgrades, and that truck was the loudest-running vehicle I’ve ever heard, including our farm equipment. It sounded like a pack of Harleys tearing through a Billy Idol concert. Sometimes I’d sneak out of church early. But my wife, Pastor Jen, always knew — she could hear my truck start up over the mighty old pipe organ.
My daughter Laurel loved the pickup. She liked that she was allowed to sit in front, as it had no back seat, and she loved being up high. She was also completely blown away by the windows. She had never before seen crank windows. She thought they were a new feature. She was used to cars like Jen’s Accord, which has a lovely interior, power everything, GPS and satellite radio. All of the things that we never used to have — keyless entry, airbags, anti-lock brakes, a backup camera, parking sensors, heated seats — those were all normal to Laurel. And my new pickup, thankfully, has all of them.

Cars have changed. I was in junior high before people even started wearing seat belts. Now the commercials for snazzy new German cars show models that almost drive themselves. Google (Nasdaq: GOOGL) and Tesla (Nasdaq: TSLA) will likely perfect this for the consumer market before the end of the decade.

A Continued Source Of Innovation
The automobile world is a continued source of innovation, and this has created a trend that leads us to this issue’s stock selection. The advances in vehicle technology are wonderful — unless or until they have to be fixed.

Fixing a car, which you used to be able to accomplish under a shade tree with a screwdriver and a crescent wrench, has become nearly impossible for average motorists, even if they’re dual-degreed electrical and mechanical engineers. It is also horrendously expensive: I remember a friend of mine in school was convinced he could build a Jeep from the ground up from parts purchased individually through a catalog. My friend Bob recently recounted a piece he read online that said doing that today with a Toyota sedan would cost more than $150,000. Times have changed.

This is the sum total of a number of automotive game-changers. These days, a relatively minor accident makes it financially infeasible to fix a damaged car. This creates a huge problem for banks and insurance companies…

What To Do With Cars That Aren’t Worth Fixing?
Answer: Offload them to someone who can get some good out of them. And far and away the leader in this space is Copart (Nasdaq: CPRT).

The Dallas-based company, with a market cap of more than $5 billion, has established itself as the leader in this niche market. Its online auction services for these cars — backstopped by a complete menu of service offerings — are the undisputed market leaders. If you’ve got an old Mustang to sell, try eBay Motors. But if you’re an insurance company with 50,000 cars a year that have to be disposed of, Copart is the only game in town. Its range of services covers everything that would need to be done — and this is key. Insurance companies don’t want to have to deal with these vehicles. They’re in the business of pricing risk, not selling cars to salvage yards (or whichever end-user bids the highest).

The best parallel for this type of business service is the REO firms that assist banks. Banks don’t want real estate on their books. REO stands for “real estate owned” and is code for properties that have been foreclosed. These cost banks a fortune, so they offload them as quickly as they can. They’re all too happy to outsource this and pay the fees. They’re in the banking business, not the real estate racket. And so it goes with cars that insurance companies have totaled. They want to get rid of them. They want to minimize headaches. And they want to do that with a professional that understands their needs and the necessity that all transactions are fully compliant with the volumes of regulations that insurance companies must abide by.

Copart’s revenue increases modestly each year, and profits are solid — the company operates at a net margin of nearly 20%. Equity has doubled since 2012, and its return on shareholder equity typically clocks in north of 20%. Assets outnumber liabilities 2 to 1. It’s built a nearly half-billion cash hoard in just the past few years, and though I’d like to see receivables a smidge lower, there’s not any real worry there — insurance companies tend to pay their bills.

It’s ability to do this job well has led to strong growth, as the company disclosed in an SEC filing: “Since our inception in 1982, we have expanded from a single facility in Vallejo, California to an integrated network of facilities located in North America, the U.K., the U.A.E., Oman, Bahrain, and Brazil.” The growth will continue: Copart plans to open another 15 locations in the next 12 months.

Another thing to like: Copart recorded $66.1 million in capital expenditures in its most recently reported quarter, 18% more than the $55 million it spent in the previous quarter.

Finally: Buybacks. When a company deploys its cash to buy back its own stock, there’s no conclusion other than it thinks the stock is too cheap. Astonishingly, Copart has repurchased about 14% of its outstanding shares in the last year. The board of directors embarked on an ambitious buyback program, and the company can still buy another 44.5 million shares. This will seriously juice per-share returns, which likely will have a strong effect on its share price.

Given the ultimate effect of the buyback and Copart’s current earnings multiple of just under 25 — a slight premium to the broader market, which is richly valued — these shares strike me as having far greater growth potential for the foreseeable future than the S&P 500.

P.S. Most investors probably come across a triple-digit winner once every few years — if they’re lucky. But I’ve identified 10 little-known stocks that could deliver triple-digit gains this year. And they’ll do it from some of the most game-changing innovations the world has ever seen. My research staff and I have issued a full report, which you can view here.