The Jensen Investment Team Adds Copart (CPRT) to the Quality Growth Strategy
September 2024
Copart operates auctions and wrecking yards for salvage-title vehicles. Copart’s primary suppliers are insurance companies, and its customers include auto rebuilders, dismantlers, individuals and small businesses. Copart’s business is primarily in the U.S., but the company has been expanding in Europe, particularly in the U.K. and Germany. In the U.S., the industry is a duopoly where Copart is the market leader with about 40% share.
Know What You Own
We believe Copart enjoys several competitive advantages, primarily driven by the company’s scale and scope of operations. Insurance companies want the best and broadest service, especially during surges in claims that occur during natural disasters. Copart is an essential partner both day-to-day and during disasters, including pickup, delivery, auction and title transfer. Insurers also want the best sales prices for these totaled vehicles, which offsets the cost of paying out an insurance claim. Copart has more auction participants than smaller rivals, which can drive up auction prices and generate better returns for insurance companies. While Copart typically only collects a fee for its services, in some cases the company does purchase vehicles and take ownership. Sales of purchased vehicles generate about 20% of revenues.
Another notable fact is that vehicle accident rates have declined steadily over the past century due to technological innovation. While Copart believes that the accident rate will continue to decline, it notes that the total loss frequency, or the percentage of wrecked cars that are not worth repairing, has increased over time, largely driven by increased technology content on vehicles, higher labor costs and auto repair industry consolidation. Additional offsetting factors include increased traffic congestion and the tendency for drivers to take more risks when driving vehicles with more safety features.
Outlook
Going forward, we believe that Copart has solid long-term growth drivers, including market share gains in both salvage-title and clean-title vehicles; expansion in Europe; acquisition of smaller competitors; further expansion into ancillary markets; and increasing natural disaster frequency due to global warming. Likewise, we see many positive margin drivers, primarily focused on revenue mix changes to favor auction sales, export sales and higher-value vehicles. Overall, due to the company’s solid competitive advantages, good growth profile, high margins and strong balance sheet, we have a positive outlook on the company and added it to the Quality Growth Strategy based on the stock valuation at the time.
Strategy holdings are subject to change and should not be considered recommendations to buy or sell any security. Please click here to view a list of the Jensen Quality Growth Strategy’s current holdings.
The company discussion is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Quality Growth Strategy and does not represent all of the securities purchased and sold for the Strategy. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
Certain information contained in this material represents or is based upon forward-looking statements, which can be identified by the use of terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of a client account may differ materially from those reflected or contemplated in such forward-looking statements.
This information is current as of the date of this material and is subject to change at any time, based on market and other conditions.
Jensen Investment Management, Inc., is an investment adviser registered under the Investment Advisers Act of 1940. Registration with the SEC does not imply any level of skill or training. Although taken from reliable sources, Jensen cannot guarantee the accuracy of the information received from third parties.
© 2024 Jensen Investment Management.
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