Fundamental Analysis of Copart Inc.

Nov. 06 2007 By Zhifeng Chen, Chris Ehley, Eric Nichols and Xiaoting Yang

Outline

Company Background Overview Industry summary Business, strategy Competition Issues, potential risk Recent major acquisition & related issues.

Stock & Portfolio Recent performance Portfolio positioning Correlation matrix

Valuation Key assumption Model & calculation

Conclusion & Recommendation

Copart – The Business Simplified

Insurance company sends a claims adjustor. Claim adjustor decides repairs will cost more than cash value of car pre-accident. Car still has value though!

Insurance company writes the bad driver a check, and now owns a totaled vehicle.

Bad driver gets into an accident

Insurance companies are notoriously greedy, and want maximum value from totaled car

Copart steps in. They facilitate the selling of the car to a buyer, in this case most likely a vehicle dismantler. All the while, they store and “maintain” the vehicle

Car gets towed to a local salvage yard.

Vehicle is sold via the internet using (VB2) technology. Copart hands a check over to insurance company.

Copart keeps a % of the sale of the car

Value Added

Maximum value for vehicle Established extensive network of buyers and

storage facilities (more available buyers = higher price)

Storage of vehicles Insurance companies are financial machines and

do not want to deal with tangible assets Offering of peripheral services

Small services (sprinkles on the ice cream) CoPartfinder, On Demand Reporting, DMV eprocessing

Overview Primary business: Provides salvage vehicle supplier full

remarketing service to sell their vehicles primarily through its online auction platform (VB2).

Two business models: agent (US) and principal (UK) Principle business growth strategy: acquisition of new

vehicle storage facility national-wide and overseas (UK) Recent major operations:

In 2004, converted all remarketing facility to VB2 platform In 2006, formally discontinued its public auction business, Motors Auction

Group In 2007, acquired Universal Salvage plc (UK)

Critical factors affecting its business: Competition The ability to establish new facility The success to expand its VB2 platform usage Large abnormal weather condition ( such as hurricane Katrina in 2006)

Salvage Vehicle Remarketing Service Industry It provides a channel for salvage vehicle suppliers to

liquidate their total loss vehicles Insurance companies are the primary source of salvage

vehicle Major factors affecting supplier’s decision on choosing

salvage vehicle sales company: Net return from salvage vehicle Level of services provided by sales company National coverage/response and the ability to generate custom seller

report

Vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters are the primary buyers

The development of costly and easily wrecked auto features will increase the supply of total loss vehicles in the future

Copart’s Service Offerings Online supplier access Salvage estimation Virtual insured exchange (VIX) Fast response transportation services Vehicle inspection On-demanding report DMV processing Flexible vehicle processing program

Percentage Incentive Program (PIP), Consignment Program or Purchase Program.

Buyer network Unique sales process CoPartfinder

Business Growth Strategy Acquiring new storage facility in key markets

123 facilities in US, 1 in Canada and 7 in UK as of July 31, 2007 Acquired 16 facilities and established 14 new facilities since fiscal 2005

Pursuing new national/regional supply agreement Expanding new value-added remarketing services Implementing VB2 platform

Competition Large national/regional vehicle auctioneer: direct

competition ADESA Corporation; Auction Broadcasting Company; Insurance Auto

Auctions, Inc.; Manheim Auctions and SADISCO

Large national vehicle dismantler and trade groups of dismantlers : purchasing directly from insurance company thus bypassing sales company, including Copart. Greenleaf and LKQ Corporation; American Recycling Association; the

United Recyclers Group

Competitor’s advantage: Established relationship with supplier and buyers Greater financial resources

Copart’s Competitive Advantage National coverage/response

Operates in nearly every state in the US (http://copart.com/qfaclty.htm) In state buyers accounted for 50.8% of total vehicles sold (25.1% of salvage

vehicles were sold to out of state buyers and 25.7% were sold to out of country buyers, based on registration)

Full remarketing service including a number of value-added services

Proven ability to acquire and integrate acquisitions Strong information technology support

Issues That May Affect Copart’s Business Environmental matters (contamination and disposal

concern) Spills of fuel, motor oils and other fluids Petroleum products and other hazardous materials Waste materials such as solvents or used oils

Governmental regulations Legal proceedings

Involved in several litigation and damage claims regarding injuries, property damage, and handling or disposal of vehicles

Oil prices Significant increases in oil may correlate to less driving and less

accidents

Loss of major suppliers Technology risks No prior knowledge of foreign markets

New acquisition in UK On June 14, 2007, acquired Universal Salvage plc, which

operates 7 yards in UK – $120 mil On August 1, 2007, acquired Century Salvage Sales Limited,

which operates 3 yards in UK - $9 mil Operates as a principal, instead of an agent in US lower

profit margin Other concerns

Tax level Currency risk Culture

U.S. vs U.K

Agent relationship Less risk Higher margins? Greater market risk?

Principle relationship Higher, unknown risk Unknown margins Balance sheet

considerations Guaranteed market

(government)

Currency Risk

British Pound has appreciated against the dollar, the weakening US economy may perpetuate this trend

Good for Copart. International business as it increases the real value of income Neutral for Universal Salvage, as there is no indication of exports/imports

0.53

0.48

Stock Performance (last year)

Price raised from $28.75 to 37.13

No dividend/split in last 52 weeks

• Market Cap is 3.28B• P/E (ttm) is 25.45• Diluted EPS (ttm) is 1.46• Revenue (ttm) is

560.68M • Operating Margin (ttm)

is 36.23%• Profit Margin (ttm) is

24.32% • Beta is 2.36• 52 week range: $27.36 -

38.58

Stock Performance (in portfolio) RCMP Portfolio History

Purchased at $7.82/share for 1,000 shares on Feb 28, 2003 (total $7,820)

Current price $37.13, market value $37,130.00 (374.81% gain over 3 years)

Portfolio composition :Market Port f ol i o

5. 56%11. 50%

9. 71%

0. 96%

9. 92%

2. 98%5. 42%3. 17%

5. 97%

5. 58%

5. 11%

34. 12%

AEEAEOCPRTDFSFRJ KHYKMBMVSNSRCLSRZWAGcash

Correlation Matrix

Valuation• Estimate future cash flow from current balance sheet,

income statement and business growth activity Assumptions Calculate WACC Beta assumption a bit arbitrary

We feel Copart as a business is pretty defensive in terms of its offering The financial beta ( cov(cprt,mkt)/market variance) is very large – unrealistically

large Published betas > 2 Decided to use a beta that addresses the underlying risk of the

company: 1.2<Beta<1.5

Estimate firm value by using DCF Intrinsic value per share Sensitivity analysis

Assumptions

Cost per opening/acquiring a single yard: 2500 – 5000 CAPEX per Yard per Year: 500 to 800 (CAPEX tends to be more volatile

than such) Yard Openings: Declining numbers with increasing cost Revenues Per Yard –

Dependent on overall Growth Assumption Matching past revenue growth (15 to 18%), and maintaining a

reasonable revenue per yard results in excessive Acquisition cost (8 Yards Per Year) driving future FCF down

Inventory (New Line item due to UK acquisition, is at normal level?, 6 million) and will it grow proportionately with the business (5%)?

We kept Margins at historic levels and above, although we believe the UK acquisitions will have a dampening effect With being very liberal with growth numbers, and margin numbers

still results in a current over valued market price

$ amount in (000’s)

Assumptions Cont. Synergies –Expansion into European market (25%

of buyers out of country) This would look like: growth rates above historic

numbers(20%) with historic acquisition numbers(4 – 5 per year)

We believe this what current consensus is We believe this is unrealistic (transportation costs

restrictive) However, with these assumptions current stock

price is reasonable (fair price)

Free Cash Flow ProjectionFCF

2003 2004 2005 2006 2007Net Income 57,222.20$ 79,220.30$ 102,116.00$ 96,947.00$ 136,338.00$ + Depreciation 30,808.30$ 30,466.00$ 31,456.00$ 37,089.00$ -NWC Change 4,978.90$ (1,722.90)$ 8,674.00$ (8,809.00)$ -CAPEX 69,333.00$ 70,700.00$ 120,000.00$ 196,800.00$

FCF 35,716.70$ 63,604.90$ (271.00)$ (14,564.00)$

2008 2009 2010 2011 2012162,752.69$ 197,545.62$ 236,164.53$ 285,020.13$ 335,130.58$

49,758.12$ 57,922.92$ 66,400.20$ 75,192.98$ 84,304.45$ 10,337.72$ 11,288.81$ 13,550.64$ 16,150.17$ 19,137.97$

107,700.00$ 113,400.00$ 117,740.00$ 122,122.00$ 126,548.10$

94,473.09$ 130,779.73$ 171,274.08$ 221,940.94$ 273,748.95$

WACC Calculation

we = 100% β = 1.30 wd = - Tax = 35%

rf = 4.7%rm= 10%

CAPM MRP = 5.3%

Cost of Equity: 11.59% Retention Rate:100.0%

WACC = 11.59%

WACC Calculation

Present Value of Total Cash Flow

PV of Cash FlowsWACC 11.59%

4.5%1 2 3.00 4 5

2008 2009 2010 2011 2012 TVCash Flow 94,473$ 130,780$ 171,274$ 221,941$ 273,749$ 4,034,805$ PV 84,661$ 105,024$ 123,258$ 143,132$ 158,207$ 2,089,637$

Total Value 2,703,919$

Sustainable Growth

Intrinsic Value Per Share

Intrinsic Value Per Share (Price)

Equity Value: 2,703,919$ - Debt Obligations -$

= Intrinsic Value 2,703,919$

# of Equity Claims: 88,334

10% Up 10% DownValue Per Share: 30.61$ 33.67$ 27.55$

Adjustments

Sensitivity Analysis

  Sustainable Growth

  $ 30.61 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.0%

  8% $ 44.15

$ 47.98

$ 52.67

$ 58.53

$ 66.06

$ 76.11

$ 90.17

$ 111.26

$ 111.26

W 9% $ 36.66

$ 39.24

$ 42.29

$ 45.95

$ 50.43

$ 56.02

$ 63.22

$ 72.81

$ 72.81

A 10% $ 31.20

$ 33.03

$ 35.15

$ 37.61

$ 40.53

$ 44.03

$ 48.30

$ 53.65

$ 53.65

C 11% $ 27.06

$ 28.41

$ 29.94

$ 31.69

$ 33.71

$ 36.07

$ 38.86

$ 42.20

$ 42.20

C 12% $ 23.81

$ 24.84

$ 25.99

$ 27.28

$ 28.75

$ 30.42

$ 32.35

$ 34.61

$ 34.61

  13% $ 21.20

$ 22.00

$ 22.89

$ 23.87

$ 24.97

$ 26.21

$ 27.61

$ 29.21

$ 29.21

  14% $ 19.07

$ 19.70

$ 20.40

$ 21.17

$ 22.01

$ 22.96

$ 24.01

$ 25.19

$ 25.19

  15% $ 17.29

$ 17.80

$ 18.36

$ 18.97

$ 19.64

$ 20.37

$ 21.18

$ 22.08

$ 22.08

  16% $ 15.79

$ 16.21

$ 16.66

$ 17.15

$ 17.69

$ 18.27

$ 18.91

$ 19.61

$ 19.61

Model

Go through different scenarios High growth, with Large Number of Acquisitions High growth, with Few Acquisitions Normal Growth, Historic Acquisitions

Conclusion Copart is a healthy growing company, but current market

conditions have overvalued its equity Its intrinsic value per share is estimated to be $28 - 30 Today’s trading price is $37.14

Our recommendation: SELL 300 Shares at Market

Sources Copart SEC filings http://www.finance.yahoo.com End-of-Life Vehicle Directive,

PriceWaterhouseCoopers