Chit Chat Stocks - Copart: A Compounder Stock Down 54% From Highs (Ticker: CPRT)

Episode Date: July 8, 2026

On this episode of Chit Chat Stocks, Ryan dives into a research episode covering Copart. We discuss: (00:00) Introduction (05:52) Understanding Copart's Business Model (14:32) Competition in the Vehicle Remarketing Industry (29:36) Understanding Market Dynamics and Natural Disasters (31:44) International Expansion (33:28) Management Changes (39:04) Market Share Challenges (45:05) Valuation (50:23) Investment Decision ***************************************************** Subscribe to our newsletter, Emerging Moats: emergingmoats.com  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

For the past three years, IBKR individual clients averaged 24.3% annually, beating the S&P 500's 23.1%. Lower costs and 170-plus global markets matter. Interactive brokers, member SIPC, visit ibkr.com slash performance. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode.

welcome into the chit chat stocks podcast a podcast to help you find your next great investment my name is brett schaefer and i am joined by my co-host ryan henderson today on our wednesday episode we are bringing you another ryan research episode and we are discussing copart a potential fallen angel and we wanted to discuss this company because i believe it was on the power hour one of the nice spotify or youtube comments we get we were told that we misunderstand copart because we made a offhand comment on the power hour so we wanted to fix that and do some real due diligence on this stock well at least ryan did i'm going to ask him questions about the business but before we get started remember to give us a review on spotify apple podcast or subscribe on youtube

so you never miss an episode and subscribe to the newsletter to join our podcast chat community and get more stock analysis the link for that is in the show notes ryan let's get into copart you have a quote from here from a hedge fund i believe and so that's going to lead right into it yeah so whether or not you're familiar with copart the stock is down i believe if more than 50 percent from highs and that's part of what inspired me to research this and uh as i was looking into copart i found this write-up from shrikant vizwanathan apologies if i'm pronouncing that wrong but it was his svn capital is his fund he's i've actually interviewed him a while back i can't remember where but uh in his 2025 investor letter he wrote about copart and he's been a long-time shareholder

He says, My long-term optimism is unchanged. Copart still enjoys a wide moat built on its real estate footprint, nearly 19,000 acres of owner-controlled land, its dense buyer-seller network, more than 750,000 members across 170 countries, and its proprietary auction technology called VB3, all supported by a fortress balance sheet with no net debt. management and directors own meaningful stock and have a long history of rational capital allocation, including an open-ended share repurchase authorization. It's a good summary for what we're about to discuss. We're going to get into the actual business model. I think that will be the bulk of the show today because it's not that intuitive, but I'll leave it there. I guess I'll maybe ask you a question, Brett. How much did you know about Copart prior to doing this episode i knew that they owned the land because that's what everyone quips and says in their 30 second elevator pitch and that gives them the advantage i know they have some

sort of junkyards uh or they have a better business term for that what you get into that i thought it was funny reading your notes and that it i guess the analogy i had in my head Is it similar to waste management or airports where in a metro area citizens don't want a million of these and the scarcity gives you kind of an advantage? And that's that's all I know. Yeah. And Copart, the founder, Willis Johnson, we'll get into this history throughout the show, but he wrote a book. I believe it's called Junk to Gold is the title. Maybe you can fact check me there, Brett. On basically how he built the business. And I have found that typically when a founder writes a book about how they built a business, it tends to lead to more investor enthusiasm, which I think is why Copart has sort of been a value investor darling that plus exceptional returns for the better part of 20 years.

but before we dive into the business how i got interested in this to begin with is it's a fallen angel this was one i just mentioned it a lot of value investors loved it has long time been lauded as one of those great long-term compounders that dominates an industry everyone else overlooks and it's kind of one of those business models you don't really think about or maybe you don't even know exists, but investors loved it for good reason and they were rewarded with a consistently above market multiple. Since the 1994 IPO, they have generated more than an 18,000% total return and that is after this recent drawdown getting cut in half. So that comes out to more than a 17% annual return, spectacular results if you've owned shares over that time. But as with seemingly

every non-AI infrastructure stock at the time. At this time, shares of Copart have plummeted over the last couple of years. Shares are now down 56% from highs, largest drawdown in more than 20 years. I admit I'm somewhat new to Copart. I know there's shareholders that have been in this one for quite a while. I didn't start by reading the book first. I started because it looks really cheap and it's got some fantastic fundamentals and the the name of the book is junk to gold as you mentioned ryan so anyone that wants to look that up i'm sure it's quite good a lot of people have recommended it and who knows maybe copart can be an ai stock if caterpillar is going up 5x as an ai stock who knows maybe copart in the future could be as well i don't see it yet

but maybe there's a world in which it's possible yeah we will see we will see all right let's get on to the next topic here where does copart fit in the auto industry talk about their customers suppliers where they fit in this ecosystem and how the business model essentially works from customer to sale buying and selling uh used or not used vehicles total vehicles yeah i'm going to spend some time on this part because i don't think it's a business model that people are that familiar with so the easiest way to explain the business is to give an example of a typical transaction so imagine you're driving and you get in an accident let's assume you're insured and just for example purposes let's assume you're fine you're able to walk away you're okay

but your car took some pretty serious damage what would happen after that well first of all be safe pull off the road call the police but the next thing you'll want to do is take pictures of everything and file an insurance claim your insurance company will then arrange to tow the car to an improved collision repair shop or temporary storage lot, usually. While it's in that shop or storage lot, the insurer will have an adjuster look at the damage and determine the repair costs relative to the value right before the accident. So repair costs versus the pre-accident value of the car. If the repair costs would be too high, usually it's about 70 to 80% of the vehicle value, if it's above that threshold, the insurance company will declare the car totaled or

a total loss. That's where Copart comes in. Once the car is declared a total loss, the insurance company will assign the vehicle to a salvage yard. There are pretty much two companies in America that own and operate salvage yards. There are more, but 80% of the market is made up of these two companies. It's IAA, Insurance Auto Auctions, and Copart. The two of them count for 80% of all salvage yards in America. Let's assume for this example that they decide to assign the vehicle to a Copart salvage yard, which Copart is the leader here in terms of market share. Copart would then dispatch one of their tow trucks to move the vehicle from that temporary lot to the salvage yard or the junk yard they they use some other terminology for it called i think

vehicle remarketing services as opposed to salvage yards which maybe makes it sound a little bit better but anyways during this process so just to rewind here you got an accident insurance sends a tow truck tow truck takes it to a temporary lot they determine that it's totaled Co-part goes and picks it up and brings it to their lot. During that process, you, the driver, would get paid out whatever the insurance company deems as your actual cash value minus your collision deductible. And you would then sign the vehicle title over to the insurance company. This is important. The insurance company owns the car at that point. Now, once the car is on co-part's lot, co-part will do a little bit of light

cleaning of the vehicle make it look slightly nicer and it'll take i think like 10 photos of the of the vehicle they will then list the vehicle details and the pictures on their website at copart.com you can go you can look it up i mean you or me brett could go and buy one of these vehicles if we felt so inclined yeah values a little value investment there yeah buy one of these? I don't think that's our expertise. No, I think unless you're a mechanic or a part shop or something like that, it doesn't make much sense to be a buyer, but who knows? Once it's on copart.com, they conduct an online auction for the car. There will be a bunch of potential buyers bidding on that vehicle. So I've got a picture here of copart.com. I can already see whatever,

10 vehicles. Maybe they look okay on the surface, but there's something wrong. some of them are totally damaged but maybe there's something wrong and it's total on the inside the buyers which typically include dismantlers rebuilders scrap dealers and often it's international buyers too by the way so like if if i am in brazil and my labor is much cheaper to resurface a vehicle and i can sell it for more elsewhere all of a sudden you're not you potentially have higher margin than a u.s scrap shop if that makes sense does that kind of geography arbitrage make sense yeah i mean especially if there's you know import restrictions for new vehicles in certain markets yeah i can can add uh help there and especially in areas with

lower income per capita i think it makes sense yeah once someone has and i guess i should also mention because there are so many buyers because copart is the leading uh total vehicle auctioneer marketplace they tend to get the best price their vehicle sales price is higher than you'll see on iaa or any other service so and that not only benefits copart but it also benefits the insurance companies. Because keep in mind, the insurance company is still on the vehicle. So once someone's won the auction, the buyer will send a tow truck to the Copart yard and pick it up. Keep in mind, vehicle still belongs to the insurance company. Copart is just the broker. So Copart gets paid primarily in two ways. One, they get paid by the insurance company. Usually this is a fixed fee for

picking up the vehicle, cleaning it, listing it. It's not that meaningful, but it'll sometimes account for one to two percent of the vehicle's overall sales price on average. Two, they charge the buyer a commission. So when they buy, like, let's say that scrapyard or the dismantler buys a vehicle, usually, depending on the vehicle's price, 10 to 15 percent of that vehicle price will get paid out to Copart. And again, there's kind of different tier structures, depending on the customer you are, depending on the average cost, depending on how much vehicles you're buying, maybe you're buying volume, like a whole fleet or something. Those sales commissions account for 85% of Copart's revenue.

So that's the bulk of the business, is commissions from the buyers. Copart is, for all intents and purposes, a broker between insurance companies and dismantlers, rebuilders, scrapyards. So you may or may not have mentioned the land advantage yet, but are they actually holding the cars on the balance sheet or is this part of the Capital Light model we discussed pre-episode where they don't have to have this as inventory or does it cycle through quickly? How does that work? They hold the cars on their land, but they don't purchase the cars at any point. Remember, the insurance company still owns it. So the car is not on – maybe there are certain cases where they pick it up. But for the most part, it's the insurance company that still owns the car. So the cars are not on the balance sheet, no. But the land, they own the land, and there's probably some maintenance capex that's required for the land. But at the end of the day, these are largely just big, massive dirt or paved lots with a bunch of cars on them. And you can look up pictures online.

There's tons of copart yards. It's usually just massive junk yards. That's different, right? That's a different – there are different sort of junkyards. It's really not a junkyard. These are – when I think junkyard, I think parts. These are complete vehicles. It's a full lot of vehicles where maybe the engine is busted.

Maybe something is wrong with the exterior. Maybe there's been terrible hail damage and it's going to cost so much that it's just been deemed totaled. So just think basically owned parking lots that they are storing vehicles on behalf of insurance companies and they're selling them in the process. Their goal is to find a buyer as soon as they can so they can turn them over more and more. Yeah, I'm looking at the locations in our hometown of Seattle and both locations in the north and south side are well outside of the metro area. So these aren't going to be in the middle of city centers, obviously, but they're even going to be well outside of kind of the suburb limit. Kind of look at a typical United States city. Let's move on to the next section, though.

What does the competition look like? Who is IAA? Take us through how this turned into a nice duopoly industry. The junkyard or salvage yard market, which the participants call the vehicle remarketing industry, is dominated almost entirely by two companies, Copart and IAA. I kind of mentioned this earlier. Unlike Copart, though, which was basically built from the ground up one salvage yard at a time by Willis Johnson, and we can talk more on the history in a sec. But IAA was founded as a roll-up of a bunch of different smaller salvage yards in 1982, which is actually the same year that Copart was founded, kind of funny enough. But since then, IAA has kind of been tossed around.

They went public in 1991, so rolled up in 82, public in 91, taken private in 2005, went public again in 2019, and then was acquired by Richie Bros for $7.3 billion in 2023. So it is now a part of RB Global, which is a public company. They are an auctioneering business and I think the majority of the business I believe is IAA at this point that focuses on vehicles and other heavy equipment too. So I think they seem like sort of a natural fit here as an acquirer. We can actually compare the two companies fairly closely because they're both publicly traded and there is some segment level data that RB Global spits out. But right now, Copart is still larger. They process about 4 million vehicles annually or 50% of the market share, while IAA processes 2.5 million vehicles, about 35% market share. So Copart is the largest, but IAA has actually been gaining share over the last five years. And that's the big reason why we've seen Copart's drawdown for the most part, I think. IAA is gaining share. For 40 years, Copart was the share taker. So it feels like maybe the thesis is breaking. And I think people are worried about that. But before we talk sort of what's happening lately, I want to address why this became a duopoly in the first place and why Copart specifically has become a 50% market share player because that's a massive dominance in an industry.

There's a few big competitive advantages. One, owned real estate. So anytime you read or hear about Copart, people are going to bring this up. Copart owns about 90% of its real estate footprint instead of leasing the land. And this is one of those things where if you were thinking two quarters out, or if you were a roll up, you probably wouldn't choose to do this. You'd probably choose to go with the lower cost option and lease it. But if you're thinking 20 years out and you're an owner operator like Willis Johnson was, this is the strategy you would do. And it sounds kind of simple. They own it instead of leasing it. But this is actually a pretty massive cost advantage for Copart. Copart owns about 20,000 acres of land, which is equivalent to 240 salvage yards for them. If they leased the land, the landlord or the property owner could consistently increase costs, obviously, which if you have tons of vehicles sitting on a lot for months awaiting title clearance, that can be an issue. So that's a big cost advantage for Copart. They don't have to deal with price hikes from a property owner. Again, they own the land and a lot of the land is totally paid for.

most people the other element here is most people don't want a junkyard or a salvage yard in their neighborhood so it's the nimby effect not in my backyard this makes it pretty difficult to replicate the footprint that copart has to to be able to purchase these big lots and set it up inside a community. I think most people would have some pushback with that. Does it kind of make sense, the real estate advantage here, how it creates a cost and ultimately margin benefit for Copart? Sure. Definitely does. I think another factor, because I was looking at, and maybe the locations in other cities are closer to the city center, but it wouldn't be technically that difficult to get cheaper land outside of the city. But if you already have one

big one in an area say north or south depending on how your city is mixed maybe you have one kind of outside in all four directions uh for a different city shape but if you have one you don't necessarily need two and maybe if you have that and iaa competing with each other it would be hard again i that's where the airport analogy comes in where you have the scale of the relationships you're not going to just put at another airport next to the existing airport that makes zero sense to me uh yeah i think that along with the real estate advantage can give them maybe better margin have they talked about how they have a cost advantage because of this or does iaa run the same type of strategy no iaa leases their land for the bulk of their land

maybe there's certain yards that they own but think about the problem that presents for IAA like it you're charging the insurance companies or the buyers 15 percent and you're like think of that as your ceiling your revenue and your floor is what you're paying in rent or leasing for it you're going to have to keep increasing prices to sustain margins which in theory copart if they charged less would aggregate more volume but instead copart is actually commanding higher prices and just basically doubling the profit margins for compared to iaa so it could either be I think if Copart wanted to, they could reduce what they're charging both on the fixed fees and maybe in the commission structure, but they don't need to be compatible in my opinion. So that's one big advantage for them.

The second one is the network effect. So Copart spent decades pioneering the digital salvage vehicle auction. They are now on their third iteration of this tech, which they call VB3, virtual bidding third generation. VB3 is home to 750,000 registered buyers across more than 190 countries. Keep in mind, not just U.S. business. So vehicle from Brazil or vehicle in the U.S. might be more suitable for a Brazilian buyer, that kind of thing. coparts auction prices are consistently higher than comparable vehicles on IAA because of this massive buyer base more buyers means more competing bids which means higher auction prices

which means more revenue per vehicle for the insurer on the buyer side they've also developed a bit of a lock-in here so buyers want access to the most inventory possible and that's why they go to copart generally but the other part is their bid history on copart creates credit limits which gives them access to higher value inventory so copart's partnered with credit providers that will extend financing to these buyers depending on their sort of credit history with copart so there is sort of a buyer lock-in and then there's obviously the seller lock-in sometimes they have even exclusive agreements with insurance companies which uh we'll talk about in a sec not all of them are exclusive, but they have lock-in on the seller side, lock-in on the buyer side, which

creates quite a powerful network effect. And then the other part, and this is one that I think gets swept under the radar. This is the actual like sort of workflow lock-in. So Copart was the first operator to really professionalize the salvage auction process. They invested heavily in technology when a lot of auctions were still being done in person this created a bigger advantage than people probably maybe even they thought would be possible so copart's api is really deeply embedded with a lot of the u.s auto insurers i've got this quote there's a great write-up from i believe it was called markman capital insights um here's the quote it says The largest U.S. auto insurers have built their internal total loss workflows around Copart's API.

When a vehicle is declared a total loss inside an insurer's claim system, that decision triggers a workflow that pulls Copart's VIN-decoded valuation, schedules a Copart tow, books a yard slot, and submits documentation through a Copart-hosted portal. Migrating that workflow to a competitor is not a procurement decision. It is an enterprise IT project that takes 18 to 36 months and disrupts hundreds of thousands of monthly claims while the new pipeline gets tested. Think about the adjuster. Think about the smaller auto insurer, maybe not the giants that have the personnel that they can develop this IT project. But if you've built the system up and you've been doing it for 20 years where anytime you've got an insured driver that has a totaled vehicle, you press that coport valuation API and it triggers the entire flow from there. And they pick up the vehicle. They get the best price.

They send the money along to you. It's really kind of a pain in the butt to disrupt that. But now, if you look at revenue for Copart versus RB Global, it's sort of flat. Well, over the last two years, they've both grown at sort of a similar rate. RB Global has grown a little bit faster. But the real market share taking that they've had is in units. So more vehicles are being processed – a higher share of vehicles are being processed at IAA compared to Copart. Now, sorry, maybe phrased that wrong.

IAA is taking share in terms of vehicles processed. Why? I think it's a logical question. And from what I can tell, it's all pretty much due to one auto insurer. So for a little bit of background, the auto insurance company in the United States is dominated by only a few providers, State Farm, Progressive, Geico, and Allstate. Those four account for almost two-thirds of automotive premiums in the United States. State Farm and Progressive are the two largest by far. From what I can tell and from industry reporting, almost all the market share losses that Copart has had over the last four or five years has come from Progressive trying to reduce its dependency on Copart. They're in the middle of rolling out this multi-carrier strategy, which basically means Progressive is just offloading some vehicle volume from Copart to IAA.

The reporting is that IAA has offered some big pricing concessions here, and it makes sense from Progressive's point of view, if you're the biggest insurer, to not have that bottleneck, I guess, of just relying solely on Copart as a supplier. So that is where I believe pretty much all the market share losses have come from is Progressive's shifting volume. You research your investments. You analyze markets. You manage risk. But did you research your broker? For the past three years, IBKR individual clients averaged an annual return of 24.3% compared to 23.1% on the S&P 500. IBKR's lower trading costs, competitive rates, efficient execution, and access to more than 170 global markets

helped investors keep more of what they earn and put more capital to work. Over time, the broker you choose matters. Interactive Brokers member SIPC. if you care about performance find out why the best informed investors choose interactive brokers at ibkr.com slash performance it did make sense when they have some sort of a scale as well they want to play the two companies off of each other it's like the joker in the dark night they're gonna have tryouts for everyone little competition uh yeah not surprising that they're doing this i think maybe if you're a copart investor you probably want good competition

within the insurance space it seems like there is but progresso has been a massive winner in the last few years and you probably don't want them to become not necessarily they're going to be a winner's take all but like a huge market share uh owner where they kind of just keep stealing share from geico and what have you you would hope that there's still more you know five to ten large competitors in the united states where copart really has the two big players yeah and this what has driven these market share losses in theory should flatten out because if progressive is trying to reduce dependency on a single player they don't want to keep shifting more and more volume to iaa because then they've got dependency on iaa so that in theory that

should start to flatten out a little bit but part of it is shifting volume but also you mentioned it progressive also taking share becoming sort of the elephant in the industry uh in terms of vehicle totaled vehicles and is this the only reason why the stock is down because i see and you can probably you know a lot of anis are looking at this is the revenue growth chart you know everyone loves this chart you don't want a decelerating company you want an accelerating growth company and outside of the pandemic this is the only period the last few quarters where coparts revenue has been flat to maybe slightly positive to slightly down essentially flat they're not they're kind of stagnating is there any other reason why the stock has gone down what over 50

to as we'll get into the end here it's cheapest valuation in years yeah totaled vehicles total totaled vehicles uh so total vehicles that have been totaled the supply of totaled vehicles yes uh dropped i think 10 percent relative to 2024 2025 and so there was a major drop part of that was uh i guess there's less insured drivers on the road so auto insurance has become unaffordable for a couple million of customers which i thought you had to have that well you have to have it sure but you know if people can't afford it or whatever they aren't necessarily going to stop driving that's fair that becomes their problem down the road obviously but yes that that has been a headwind and then the other part is uh less catastrophes so part of

Part of the volume is the situation we described where someone gets in an accident and the vehicle gets pushed to the tow yard. The other part is if you have a hurricane, those vehicles are totaled. If you have a massive storm, those vehicles could potentially be totaled. That could be even a fleet of vehicles from a dealership or something, for example. So that drives a lot of volume for them as well, and there were less catastrophe or natural disaster-driven vehicles funneled into Copart's yard. So kind of a double effect there, market share losses plus industry contraction. But on the natural disaster front, I'd argue that's temporary. I mean there's going to be some lumpiness there naturally.

Okay. One more question before we talk about the CEO change up, the international revenue. I'm seeing $836 million versus $4.6 billion in total revenue. So small part of the business, but it's growing. This might be a tough comp or easy comp coming out of the pandemic. 17% annually since October 2020 to April 2026 on a trailing 12-month basis. do you know the strategy is here where their locations are outside of the united states because again if there is that fear of decreased supply in the u.s and the two companies here kind of have that duopoly share there's maybe not that much growth to be had from a unit basis maybe they can expand around the globe yeah they are adding more yards not just in the u.s internationally i think they operate yards in seven country 11 countries um looking here u.s canada uk germany ireland spain brazil finland uae oman and bahrain uh according to their website the other part is there's a lot of international buyers i think this is probably a tailwind for

their business they again that that same network uh network effect holds true in other countries So it's not like they have to restart from scratch like you would say with – like if Planet Fitness decided to expand into Spain, they have to build their brand up from scratch. Copart doesn't necessarily have to do that because they have a global buyer base to begin with. So they enter those markets with a massive advantage. My guess is that will continue to be a benefit for them. And I don't know what the insurance, the auto insurance industries look like abroad, but my guess is they're probably not quite as consolidated as the U.S., maybe not as much dependency on Progressive or a single player as the U.S. has. You could see, yeah, probably less maybe free market policies too, I'd assume, but you never know. Each country is different.

uh yeah but i could i mean it's a small part of the business that i think even though the united states car market is massive the international market as a whole is definitely much larger maybe could be similar to what autozone is doing by expanding to mexico and brazil that could be a nice tailwind to boost revenue growth over the next decade but let's talk about the management shakeup you never like to see this if you've been a holder of the stock and it's in like a 50 60 70 drawdown but it could be a nice indicator if you have it on the watch list that a new manager or is this uh as ryan's gonna talk about an old manager stepping back in what happened with the ceo here and the executive suite take us through the story and your thoughts

on that yeah just to give some numbers on the international size it's about 20 percent of revenue for uh copart over the last 12 months between the the fees and then the commissions but yeah on the ceo side just to back things up willis johnson founded copart in 1982 if you end up wanting to learn more about the company after this episode i recommend looking into willis johnson he's a pretty interesting guy uh very sort of classic entrepreneurial story he served i think in Vietnam, came back. His dad ran a junkyard. He worked there. He thought that they could be far more efficient, and he proved it. It reminds me a lot of the O'Reilly Automotive story. But yeah, again, recommend reading his book, Junk to Gold. But anyways, Willis Johnson ran the company

from 1982 to 2010. 2010, he stepped down. Still a very important part of the company. I think he's in his 70s now he's the chairman of the board owned six percent of the outstanding stock but no longer the ceo he handed the reins over to jay adair adair had been at the company for more than 20 years he started as an entry-level operations manager at the age of 19 he served as ceo from 2010 to 2022 and over that time over his entire time at the company he's amassed nearly a 3% stake in the business. So a lot of insider ownership here between Adair and Willis Johnson, they own almost 10% of the company. So that's very powerful for them. His time, Jay Adair's time as CEO was by pretty much all measures a success. The only knock you

could potentially have is that by the end, they started to see their market share declines from progressive, but that also might've been inevitable. So not sure you can really knock him for that. Where it gets a little more interesting is that in 2022, they started trying to transition away from Adair or trying to phase him out. And they made Adair and Jeff Liao, sorry if I'm mispronouncing it, co-CEOs from 2022 to 2024 so that they could sort of pass the torch in 2024 tough co-ceos unless you're someone that seems to have this immensely strong culture like netflix it never works even temporarily it's so yeah i mean there's just hard a lot of bad incentives it's always hard to know what's going on behind closed doors because

Because it's possible that this – that all the CEOs like each other here or all the executives like each other and that something happened in his personal life or whatever. I guess just to keep going here, Leo – sorry, I can't really say this last name – took over as CEO officially on his own in 2024. He had joined as CFO in 2016, so he'd been there for a little while. Everything looked good, and there wasn't – honestly, there wouldn't even have been much worth discussing here if it weren't for the news that came through last week. Last week, the company announced that Jeff LIAW – again, sorry, I keep mispronouncing that – will be stepping down, and Jay Adair would become CEO again. They tried in the press release to make this sound as amicable as possible, even explicitly stating that there was no disagreement between Jeff and the board and that Jeff would be staying on as a special advisor to Adair. He's also getting, I think, $650,000 in a severance package. But – so again, it's possible that Jeff just didn't want to be CEO anymore.

stock dropped 50 maybe he didn't like the criticism or the responsibility that came with it but at the end of the day it's a pretty bad look the ceo after seeding market share for four or five years stepping away and the old ceo stepping back in it gives me the disney ick the the worries that like it's a management team that that can't seem to pass on the business gracefully um but again part of this is all alleviated with the fact that there's great alignment here uh willis johnson and jay adair have combined like more than two billion dollars invested in Copart. They want this business to succeed. Willis Johnson owns 6%. Jay Adair owns 3%. And Adair has proven that he could be effective before. So I don't necessarily know what to think

here. And without having context on why he stepped down, I can't really have any strong take away negative or positive maybe it's losing the market share here maybe they soured the relationship with progressive but it can't be bad that he's returning it could potentially be positive but as we'll get into here the the problems might just be something that gets through to the other side of a short-term cycle so what is your analysis ryan on the problems of market share losses and the macro i mean we can maybe talk about self-driving cars ruining the entire business is that the long-term bear thesis that 40 40 years from now oh probably people would have said 20 years in

back in 2016 as well what about cohorts problems are they temporary or not because that's the big question with the stock again down so much and we'll talk about the pe's down to 18 even eba does down to 12 you don't need that much growth here uh a little bit of a version to the long-term growth of the five to ten percent level probably gets you a solid return yeah there are well first of all i'll just say if if every vehicle is self-driving I mean, yeah, Copart's probably going to be processing a lot less vehicles. That future seems a long ways away, if even feasible at all. For the better part of 40 years, they have had some very helpful structural tailwinds.

So for starters, there are more cars on the road today than there were in 1982, significantly more. And up until really, I'd say the last year or so, cars on the road has gradually increased and insured drivers on the road has increased as well, in America at least. Typically, it's not a huge – it's not like exponential growth, but it's 1% to 2% gradual increases. The other part that has really helped them, especially over the last decade, is that total loss frequency has risen. Since modern cars are packed with so many sensors and cameras, it doesn't actually – and recalibrating them can apparently be very expensive. It doesn't take as serious of an accident to total a car because the sensors and cameras increase the cost of repair massively. So that's led to insurance companies claiming more cars as totaled and sending more cars to Copart. The same applies for electric vehicles apparently as well.

It's easier to total an EV than it is to total an older combustion engine vehicle. So all of that has helped. Increasing globalization has helped with international buyers coming more into the scene, ultimately driving a higher price per vehicle for Copart, which means more money for the insurance companies, more money for Copart, et cetera. Yet Copart is reporting its slowest growth in more than a decade. I think we already talked about why this is happening. Partly it's because the market share losses or progressive shifting volume. But the other part is it's just been a tough year. There's less vehicles going through their system because there's less vehicles being totaled. It's kind of sad to think about this. But if you have a massive natural disaster, that bodes well for Copart in terms of volume. So that's going to hurt them. And it hurt them, I believe, to the tune of like 5%.

Like there were, I believe the number was industry vehicles totaled across America was down like 9.8% year over year. Half of that was attributable to natural disasters. The other part was attributable, I guess, to less insured drivers on the road. So I think there is obvious lumpiness in terms of volumes, but my guess would be that five years from now, there will be more vehicles that are totaled than this year. So if you're long copart, you're long tornadoes, hurricanes, and earthquakes in a sense. i guess i just do occur i mean there are long be year to year but as buffett does with the the berkshire uh natural disaster insurance and the long-term reinsurance there uh some years will

be bad some years will be good in their sense it's the opposite where there'll be one year well there's a bad earthquake for an area they're coming but for copart there might be one year where it's super tame in their areas other years it's not yeah and the other part to think about is like the more the more automated that the car manufacturing process gets the more like the higher the loss frequency will be because like say toyota is able to keep driving down costs it's be able it's able to uh continue to become more more and more efficient on the assembly line the that means okay they've got all the sensors cameras calibrated in place all of that stuff uh you know done by robots it doesn't cost that much they can sell the vehicle a more valuable

vehicle for less in theory repairing the vehicle still costs a lot of money so it's going to keep driving up the loss frequency i think that tailwind will persist my guess is that the last 10 years of loss frequencies uh increasing it is going to persist over the next 10 especially with electric vehicles okay let's get to the last two sections we're going to talk valuation capital allocation kind of capital returns here and then get to your investment decision valuation i'm seeing here at our friends of fiscal ai as everyone knows use our link fiscal.ai slash chit chat get a 15 off any paid plan check it out the link is in the show notes the ev to ebit as of when you made the screenshot i'm assuming either within a couple days of recording um this is being

recorded on july 1st so if anything radically changes i don't think it will but it's at an ev to ebit of 13 so tell us why it's gone from historically upwards of 30 down to well well below that yeah and it's up slightly today but still yeah ev to ebit basically 13 so let's go through the numbers over the last 12 months copart generated 1.4 billion dollars in net operating profits after taxes that's roughly equivalent to their free cash flow uh free cash flow slightly lower but they currently trade at a 26 billion dollar market cap and a 22 billion dollar enterprise value so they've got a really clean balance sheet actually 4.2 billion dollars in just pure cash with no long-term debt whatsoever so very very clean the enterprise value to notepad

at our net operating profit after taxes uh which i think is a fair valuation metric to use stands it just under 16 times now there could be some interest income as well because they've got 4.2 billion on the balance sheet so maybe you could use net income but let's let's assume mid-teens earnings multiple or lower the only reason i didn't include the interest income is because they are starting to use that cash balance so this is their cheapest valuation in pretty much a decade, management has responded to the drawdown by spending a ton of money on buybacks. So I've got a free cash flow versus buybacks chart here. And basically, they are opportunistic share repurchasers. So they wait for the right time, and then they plow money into the buybacks.

There has been basically no repurchases for 40 quarters until the last two quarters. In the last two quarters, they spent $1.4 – well, $1.6 billion on buybacks. Keep in mind that – so six months, they bought back more than 4% of their stock. They reduced their shares outstanding by 4% just last quarter. So they are getting very, very aggressive. The question here as to whether or not the investment will work is, do you believe Copart will be processing more vehicles in five years? I think if you believe the answer is yes to that question, you probably generate good returns from here. And the equation is pretty simple.

Vehicle volumes plus higher average selling prices plus margin expansion. Keep in mind the owned real estate has helped with operating leverage. Again, margins can be lumpy too, but really over the last decade, margins have trended higher. So margins, higher selling prices, higher volumes, plus share repurchases. I think you've got a pretty simple formula for 10% plus profit growth on a per share basis. It's hard. I can't imagine there's going to be more multiple compression if they are growing volumes again. So I would say that probably shakes out to about what your returns would be unless you get multiple expansion as well.

Yeah, they stagnate. You can maybe see some multiple compression, but it seems like we're pricing in famous last words, a lot of compression there and looking – or sorry, stagnation already on that volume given where the EBIT is. And if you look at that chart, again, the fiscal AI chart that we have here in the show notes, the free cash flow, again, fairly steady. If you look at a trailing 12-month basis quarterly, it's a little lumpy versus the buyback. This is one of the most aggressive they've been in history and the most aggressive by far in the last decade. So if you look at the next five years, if the multiple doesn't go anywhere, they could probably take shares outstanding down by 20, 30, maybe even higher, 20, 30, 40%, which is not a bad place to be in unless you think the business is totally going to collapse. so ryan this is kind of and we had a show last week talking the same thing a lot of fallen angels out there or potential falling knives you know value traps there seems to be a lot of potential

opportunities of stocks trading at cheap multiples they've historically been you know durable growth compounders are you buying shares of copart do you see something in your existing portfolio you could switch out or is it staying on the watch list for now? Yeah, my only hesitation would be opportunity cost. It just seems like a lot of great companies are trading at attractive valuations at the moment. But I think you get 10% plus annual returns over the next five, 10 years with Copart. I think this makes for a pretty good investment. I will probably buy some shares it to me my the the only thing I really like is context on why insured drivers are dropping is like if that's a headwind that's going to persist

like if auto rates are so unaffordable that just more and more low-income consumers are just going to take the risk of being uninsured that's a that's a real potential problem but my guess is also that there would be some sort of i don't know government step in if that's the case if more and more drivers on the road are just driving around without insurance that that's a problem that's a societal problem so i'd like to know what's going on there but I think you look at the buyer network. The part that got me the most excited about Copart was actually that little piece about the API, where if you're an adjuster at this insurance company, you're clicking one button and basically, boom, everything else is going through Copart and you

just want the highest price that Copart can get you at their auctions. That to me seems very, very durable over multiple decades even if progressive hits the iaa button a couple more times i think copart's going to ultimately be just fine all right yeah i think it's the same for me i look at my portfolio i kind of think i see from at least existing holdings if you're going to replace something especially with the tax hit you're probably going to have if it's been a winner um you want to have the replacement in this case being copart having a significant better risk reward or higher upside than you believe in your current portfolio and now again uh it's been slightly painful not being really long the ai trade but it's it's been nice the

last few weeks i guess with some of those stocks falling having so many opportunities out there of these falling compounders it's kind of a problem of too much opportunity uh if you want to allocate 100 of your portfolio so yeah i think copart you probably do significantly better than cash over the long term especially if they still have good capital allocation and i guess you know you're not locking it in but i think it's a high chance of 12 to 15 returns over the next decade unless this again unless that risk comes to bear of the volume totally collapsing across the industry or the self-driving uh truthers material you know if the what would you call them the self-driving accelerationists maybe are correct which i think that's going to be a multi-decade

uh thing and there's probably still going to be people that want to drive it's going to be a mixed market so yeah i feel like it's it's it's fairly low risk at these levels famous last words but maybe if you want to fade us this is not the best podcast there is i guess i had when we didn't talk about is like better and better driver assistant technology potentially reducing reducing the amount of auto crashes that even if it's not full self-driving if you know if cars are stopping on their own uh before hitting a vehicle that's you know a headwind to copart it's good for society but a headwind to copart yeah that is fair maybe people getting distracted on phones

you know people driving high on marijuana which is a been a decade long term maybe that's a bold thesis for copart they have weird incentives not like they would actually drive that behavior but the out some bad outcomes you know you crash and totally your car people aren't happy that's a positive outcome for copart that's more volume what about you did this peak your interest it does if i got to a point which unfortunately i'm not where a lot of my existing portfolio turned into massive winners and i was like a lot of the valuations here don't look too attractive i could definitely switch this in for an existing holding but like a lot of the companies i've been looking at the last few months i don't see too many new ideas that are more promising than my

existing portfolio so it's on the watch list for sure i've been following it i'm glad we got to learn more about this stock because i feel more confident in kind of where they sit within the industry um i guess for the listener that said we didn't know anything hopefully we know a little bit more now they're not just junkyards and that was incorrect to say that by any means but i like it feels like yeah rock solid investment let me maybe i'd own if i was much older kind of looking for some stability in uh retirement or old age let me pose it to you this way copart at basically 15 times earnings or Wix

today? Wix at 5. I guess true earnings might be 10. That's tough because, full disclosure, I don't own Wix right now. You do not? No. Tax loss harvest.

Yeah. Interesting. It's been an interesting year for me and Wix. But, I mean, And I look at, for full disclosure, for anyone that, I guess, doesn't subscribe to the newsletter, the one I kind of look at now is IBKR. They're training in like a PE of 35, but I think they have a massive growth opportunity to head. Would I replace them with Copart?

I think that's a pretty even match if we're kind of deciding what's the better risk-reward here. But I look at IBKR's growth trajectory, and I think it's massive. So you got to match that up. And to replace an existing holding that's been a nice winner, you really need another, like, just something that seems clearly a better opportunity. And again, Copart versus Cash, I'm taking that 100% of the time at this valuation. But Copart versus the existing opportunities, my current holdings, I like the current holdings. All right. I think that's going to do it. Do you want to sign us off here?

I can do that. All right. Thank you, everyone, for listening. As a disclosure, as a reminder, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan, I or any podcast guest may hold securities discussed in this podcast, may have held them in the past, and may buy, sell, or hold them in the future. Thank you, everyone, for tuning in. Thank you to our sponsors, Interactive Brokers and Fiscal AI. And we'll see everyone next time. Thank you.