Yet Another Value Podcast - Andrew Wagner on Copart (CPRT)

Episode Date: April 18, 2022

Andrew Wagner, CIO of Wagner Road Capital Management, discusses his thesis on Copart (CPRT).My Copart (CPRT) notes; https://twitter.com/YetAnotherValue/status/1514627334464323589?s=20&t=yjNrQXKvqPrQdJZ_Z00TdwAndrew's post on Copart: https://www.wagnerroadcm.com/blog/2022/4/8/what-i-like-about-copart-and-how-i-found-itAndrew's Book: The Economics of Online Games: https://amzn.to/3KNkAPnChapters0:00 Intro2:05 How Andrew found CPRT5:30 What is the market missing in CPRT?9:20 What does CPRT do?11:00 What is CPRT's moat?13:25 Does CPRT's network advantages give them an edge in expansion?15:00 Bear case #1: Valuation16:30 Bear case #2: COVID earnings boost18:50 Bear case #3: Why isn't CPRT buying back shares?23:30 Why is CPRT so much better than IAA?25:30 CPRT's management27:45 CPRT's land ownership33:15 CPRT's international operations35:20 Does CPRT's moat travel internationally?38:55 Ancillary services opportunity43:15 CPRT's long term tailwinds from "totaled" cars47:00 Do EVs change CPRT's economics?49:30 Car ownership trends and CPRT

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have Andrew Wagner. Andrew is the CIO of Wagner Road Capital Management. He's also the author of a book that's shot up to the top of my reading list now that he's told me he released it. Economics of Online Gaming. I'm going to find it and put a link to that in the show notes. But Andrew, how's it going? It's going great. I am really excited for the Berkshire Hathaway annual meeting coming up for just a couple weeks. I don't I've got some personal stuff so unfortunately I can't go I know I need to go before Charlie Warren pass away but I will be if I can tempt you I'll be at the Markell Investor Day a couple weeks after that if you're looking for a backup day oh I don't know maybe you're in Minnesota am I remembering that correctly or am I crazy yeah I'm I'm in St. Paul it's only I think a five hour drive pretty easy for me to get there maybe easier than you I'm taking a quick flight. But no, I was just wondering, making sure.

But yeah, if anyone's there, slide into my DMs, I'll see you there. But I'm way off the rails here. Let me start this podcast the way I do every podcast. First, the disclaimer should remind everyone, nothing on this podcast is investing advice. Everyone should please do their own diligence, consult a financial advisor, not investing advice. Second, I'll give another quick disclaimer. My wife just had her wisdom teeth out.

So she's a little loopy in the bedroom. If anybody sees a beautiful woman on the YouTube, come and go crazy. it's the wisdom teeth surgery talking but third a pitch for you my guest uh look i i've really enjoyed your blog i thought it i thought it was one of those underfollow gems you know there's a post every couple months or something but it turns out it's not because when i went on twitter was like i'm having andrew on i got like 20 dms everybody was so excited i was like what i thought i was the only guy who had heard of this but really excited to have you on i think this is going to be an awesome podcast so that out the way let's just turn to the company we're going to talk about

The company is co-part. The ticker is CPRT. And I'll turn it over to you. What is co-part and what's so interesting about them? So I think I should probably start with the story of how I discovered this company in the first place. It's a pretty good one, actually. It's a very value investor with the minivan and everything. But yeah. Yeah, there's a book called The Sleuth Investor that might give you a little bit of an idea of what happened here. Car guys love this story because it's so ridiculous. So it was about 2014. I totaled my minivan, which was a 97 Plymouth Grand Voyager. It's a car nobody cares about. There's tons of them out there. And I knew somebody who was kind of connected to the salvage business. And he said, okay, there's three ways you can

get rid of it. You can sell it on Copart or IAA or LKQ. And then there was also a used car dealer who thought they might buy it and fix it up and sell it in their used car dealership, which I thought was a little shady, but they were interested too. And I decided that I wasn't going to do any of those things and said I kept it for the parts, and I bought another one that I was going to use those parts to fix up. And I very quickly realized that that was a terrible idea, the numbers just didn't make sense. But I actually learned a lot about the salvage business and the used car business

from talking to the tow truck drivers that I had to constantly use because the cars never worked. And the people who were going into salvage yards and picking parts out of the salvage yard to help me get my car fixed and the mechanic who just absolutely loved my business, who knows, maybe I put his kid through college. I'm not sure. If you put his kid through college, I think we'd be talking about a little bit different economics there, but maybe you put him through a weekend retreat or something. Yeah, maybe something like that.

But I will say what I learned from doing this actually has more than made up from all the silliness of what I was trying to do. I won't do it again, though. I would not recommend that. And so about three years later, I was going through. financial screen, and I generally just look for kind of strong financial returns, strong balance sheet, that kind of thing. And Copart was one of the companies that came up, and I realized, oh, this is not just a local

salvage yard. This is an international business, and they have a lot of really good things going on. And if you dig into the history a little bit, it's actually a family business that's been around, I think, 40 years. I think it was founded in 1982. And it's a second generation family business now. And what they do is very simple. When somebody totals their car, the insurance company takes it from them. and then they put this car up on Copart's auction, and then Copart just gets a cut from the

sales. And that's it. And that's basically their business. That's a great overview. Lots of places I want to go into it, including why this business is so advantage and everything. But I guess the first thing, I'm going to try and make this the first or second question I ask everyone going forward. You know, the market is a competitive place. There's a lot of things. You know, Copart isn't exactly an underfollowed company. So you've got an investment in it, right? Obviously, you have an investment because you think that investment on a risk-adjusted basis is going to generate alpha. Something generates alpha because the market is missing something that you're seeing. What is it that you see in this

company that you think the market is missing? I think it's a time horizon thing with this particular company. I think that it's one of those things that has never really looked like a cheap stock, at least as far as I know. It's always been kind of, oh, maybe that's a little bit too expensive. I'll wait until it gets cheaper. And then you look at it a few years later and it's still kind of a little bit expensive. What they have is a really long-term runway. So I wouldn't necessarily say that I see something hugely different than what other people do. It's that I'm thinking about it from a much longer term perspective and the opportunities that they have maybe over the next 10 years instead of like what's going to happen to them over the next quarter.

You know, it's one of those things. So I used to work at McKinsey and my old boss at McKinsey published a book called valuation and value. And one of the things he had in there was companies with consistently high returns on capital, consistently outperform the market over a long time. And for a long time, I think people have tried to think through something like that. Like, why do these companies consistently outperform? Why aren't they priced higher? And I kind of think what the thing is, the market kind of assumes after five years that that competitive edge is going to shrink. And you can make an excess return kind of by looking out to years five through 10. And I know people call it time horizon arbitrage. But what it really is is saying

this return is consistent and I'm actually going to keep earning it over in the excess time frame and by doing that you capture that spread year after year after year. Now you are exposed to like some tail risk where you know like a Kodak earned excess returns for 30 years and then all of a sudden photography went away and it went to zero. But the nice thing with Kobart is use car, well, to probably talk about that later, but use cars and everything probably isn't going to go away. So you probably can keep earning that return. Does that make sense or do you have anything else to add there? Yeah, that makes total sense. This market,

in my opinion, is not just going to disappear. And the thing I would add to it from a qualitative perspective is that it's a family business. The CEO is a major shareholder and has

been with the company for a very long time. And when you have that really deep knowledge of the industry, you can do things a little bit better, even if it's a more competitive industry, I think they'll do a little bit better just from having management that's been around forever, management that's heavily invested in the company, those kind of things, too. I don't think I have ever read a, I read and flip through a lot of proxies.

I don't think I've ever read a proxy quite like Copart's proxy. I was joking online. It's like it's kind of compounder bro porn in that it's like, look, we basically don't pay our CEO. We only give them stock options. He gets rich when our stock goes off. There's a line like nearly three decades of strong share performance by Copart and 30 years as a senior executive have enabled our CEO to build a substantial personal wealth, which is a little bit understating because it's worth like a billion dollars now, right? Like it's incredible. People should go read it, how they compensate and everything. It is absolutely incredible. So let's dive into the business, right? You said Copart, what they do. Somebody wrecks their car. Generally an insurance company will toss the car over to Copart who's going to sell it either. I believe they sell it on the market.

and people will take it apart for parts and stuff is generally what the car is going to get used for. Is that right? So why is that an advantage business, right? It sounds pretty simple. Like, hey, I'm just going to run an auction for a car. Like, all I have to do is take the cars from the insurance company. Like, why couldn't the insurance company run it themselves or all this type of stuff?

I think that's a really good question. And I think the biggest response to that is where are they going to put these cars? I think that's the biggest problem when the insurance company takes a total car where are they going to put it, where are they going to store it, they're still probably going to have to pay someone else to do that. So Copart is kind of taking that,

which is actually the business they started in, really, was being the storage and then selling at a local auction. So I would say that's probably why an insurance company wouldn't want to do themselves. They also don't necessarily want to be in that business. It takes a completely different skill set to service a car, to sell a car, all those other things. From the insurance company's perspective, and I think this might be true for all insurance, they just want to be

done with it. Yeah. They don't want to hold on to that asset for any longer than they have to. So I don't disagree with anything you say there, but I do want to push back a little bit because co-parts earning really nice returns on capital, right? Like one of the lines in the proxy is 30 years a strong share price performance. Like 30 years a strong share price performance tends to attract some competitors. But here you have a market where it's pretty much Coke part and IAA basically control this market, right? They're the two big boys. I think they have 85, 90 percent share. Like nobody competes with these guys. So obviously there are. some benefits to scale, some benefits. What is really driving Copart and IAs benefits to scale

where they can have this oligopoly? So I would say that it's kind of driven by the network effects of the number of buyers that they can get globally. And I think, I guess to go back a little bit kind of answering your previous question is when you look at the European model, it runs a little bit differently than the American model does right now, where the European insurance companies, they'll pay the difference in the vehicle, and then it's the policyholder's responsibility to get rid of the car instead of the insurance company.

So even in that case, where Copart isn't really there yet, the insurance company still doesn't want to keep it. And I want to come back to that comment on international, but I think you can also see the first thing you said what there was, you're not going to have that huge marketplace of buyers, right? There are hundreds of potential buyers for a scrap car, right? Basically, everyone who needs parts is probably going to bid on a probably would consider bidding at a car, a scrap car at the right price. You need to go connect to all of these different buyers. So in many ways, this is, as you said, it's a traditional market. marketplace business. And you can kind of see that in the proxy. Their peers include companies like

Match Group, Tinder. Guess what? You need to have lots of quote unquote buyers on Tinder, right? You need to have lots of single men and single females trying to connect with each other. And once you get that liquidity, it's a very hard moats to bail. There's other grub hub. You've got to go acquire thousands of restaurants for me to download your app and get food delivery at night. Right. So you can see that in their peers that they've built this marketplace. International. I want to turn to that because they've been attacking international. And one thing, look, I've spent 24 hours on the company. I read your write up, I read Scuddle Blubb, I've did some work.

It seems like international should be attractive long term, but I don't think the margins have quite got there yet. And my first question, we'll probably come back to international, but is this one of those things where, look, obviously this is a local business, right? If a car wrecks in New York, you're not going to ship it out to California to get scratched, right? Maybe the buyer will be in California, but you'll probably sell it from a New York yard. do they have network advantages where every yard they open, both domestically and internationally,

they kind of grab, it's more valuable to them than anyone else just because they bring that network of buyers there in the same way. I'm trying to think of another network of that company that would have, we open a new, a Walmart, right? A Walmart serves from a distribution center, and every store that they place in that distribution center gives them a little bit of operating leverage, not quite the same, but off the top of my head, I think that's a good analogy. What would you think about that? So I would say that it kind of operates just like any other network effect would.

Every node that you add increases the value of all of the other ones in the network already. And that's true for any network effect type of business, and especially any two-sided market like this one, where you have to have sellers or you won't have any buyers. So it is working like that. That's perfect. That's perfect. Let's talk real quickly. I just want to, I know you said one of the things that you think about with the company is you've got a longer term time horizon in the market and you think you'll keep enjoying that consistent. Hey, we've got a mo. We're growing a little bit. We're earning great returns on capital thing. But I want to push back on that for one second because the bare case here is obvious. I think there would be three pieces to it. The first would be valuation, right? This is about 30 times trailing price to earnings, which That's pretty expensive. So I want to talk valuation. Why is 30 times earnings?

Why can we still earn a risk-adjusted positive return with that type of valuation? Well, I don't want to get into telling people they should buy something or not buy something, obviously. We said it at the front, not investing advice, right? Not investing advice. That's a good question. And it's an interesting question because. when you think about businesses that have better returns, if you just hold them long enough, the risk of overpaying goes down over time, essentially.

Look, this is the classic thing, right? Everybody made fun of the nifty 50s, the nifty 50 in the 70s, but I believe it's been proven if you had bought the nifty 50 at those absolute nosebleed valuations at the start of the 70s and held it through, I think there was study stopped in like 2000 or something. You actually would have beat the market despite playing those news speed valuations. Now, it would have been better if you waited five years later. And instead of paying, you know, I think they were trading for 100 times fee if you paid 15 times P five years later. But it is true.

And the long run, you know, the high returns on capital are really what are going to influence your investment. But let me dive into valuation a little bit more. You know, the second bear pushback, I think, would be, hey, this isn't just 30 times. earnings, but earnings have exploded higher thanks to COVID, thanks to how crazy to use car market is and everything. So I want to ask you two questions, right? How has COVID impacted this company? And for this company, it's been in a positive way, I think. So that would be number one. And two, why do you think some of these COVID-driven dynamics are maybe a little bit more sustainable? Yeah. So it's really interesting what's happened in the used car market. And I guess for people

who aren't aware of it, I would assume everyone's aware of it. But basically what happened was there's a microchip shortage right now because car manufacturers kind of stopped producing during COVID. And now that they're trying to produce again, that microchip production shifted to other things so they can't get all the supplies they need to build new cars. So when people can't buy new cars because they're not there. They're buying used cars, and that made the price of used cars basically skyrocket. And that helped copart because the average selling price of a car went up dramatically. What's interesting about the salvage market is that it hedges itself against the value of used cars. Because as the value of used cars, because as the value

of a used car goes up, it makes it more likely, from a financial perspective, it makes more sense to repair the car. So when the value starts to go back down, it becomes more likely for a car to be considered a total loss because it doesn't make sense to repair it. And the argument that the management makes that I kind of agree with is that as prices go down, volume goes back up and the volume should go back up enough to make up for that difference. Perfect, perfect. And then I guess my last bear pushback, I think all that makes sense, but I think my last bear push, and probably the one that would get me the most, right,

is look, I think it, I agree with you, good company, great company, nice moat, it's probably going to grow over time. But I do think the management team, you know, this is one of those things. And I ask this question all the time on the podcast, right? If you've got a really astute management team who's super motivated, they own lots of shares, they're good at capital allocation, and they're not buying shares back. My question is like, why should I be buying shares, right? Because they're showing that they don't think the best use of their capital is repurchasing shares, increasing their ownership, decreasing the share account. So if they don't think that's the best use of their capital, why is buying the stock the best use of my capital?

Because I think I don't have the numbers directly in front of me, but Copart hammered their share account in 2011. And I think 2015, they did massive tender offers. And obviously, the returns from those tender offers have been great. But recently, I think over the past four years, they haven't really bought back shares or, you know, no share repurchase of note. So I look at that and I say, oh, this is a company that certainly doesn't think their stock is cheap. The CEO, again, he owns over a billion dollars. He doesn't think he's going to increase his net worth that much more by buying back shares. So why should I be buying back shares? I think that's a really interesting question. And that's a really good question because we have the option of investing in stock or

not investing in the stock, but they have the option of buying back the stock or buying more salvage yards or investing in the business in other ways. And they make the determination that maybe the stock is, so I could back up a little bit. So they'll buy back if it's extremely cheap. because otherwise it makes more sense to reinvest in growing the business instead of shrinking the market cap essentially is the way I would look at it. Yep. I think a way to put it might be, and you can tell me if I'm wrong, right? The company earns, I'm going to make a number because I haven't, I don't have a model

with like returns on capital stuff, but the company earns 20% returns on capital by investing in either international expansion, more yards in the U.S., all that type of stuff. And their stock, let's make a number up. The stock, they think if they bought it back, they deliver 10% annualized returns by buying back the stock. So for them, it's a pretty easy choice, right? All of our capital should go to opening new yards, accretive acquisitions, all that sort of stuff, because we'll get 20% versus 10%. Whereas for us as an investor, we might look at this and say 10% compounded, it's going to be very tax efficient. I can hold this for years for the reasons that we talked about.

10% is going to beat the market over the long term. So for us, because we can't go actually recreate the CarMax, the copart business, it might be better to buy the stock, even though they're not buying back. Does that make sense, or do you think I'm kind of stretching there? I think that makes total sense. And I hate to bring Berkshire Hathaway into this, but Warren Buffett kind of talks about that all the time. And people complain and complain about Berkshire Hathaway not buying back stock. But when it makes sense to do so, they'll do that. that well you know buffett also and copart might have this because they've been out they've been out for a long time

buffett also had the hey you know i've got more information about the business than anyone else and i view you as my partners by buying it back i almost feel like i'm the card shark at the table though you know berkshire got pretty pretty aggressive buying back shares over the past 24 months or so especially maybe the last 12 so i don't know how much i quite believe that at this point but it does make sense And what I would add is I read that when they did these big share buybacks, the management themselves didn't sell any shares. So they still made that decision not to do that. It's one of my favorite things when I read through a tender dock and they have not all of them, but I think most of them, all of them have to have this section, but not all of them will fill it out completely. But they'll have the directors and officers.

What are they doing in the tenders? and I love it when I read a tender and it says, hey, directors and officers own 10% of this company. We're buying back 20% and none of the directors and officers are tendering in this thing. I just love to see that setup. Let me turn to Pierce. So we talked about how this is kind of an oligopoly, right? Them and IAA is the competitor who owns another 40%. And LKQ, I think, actually, is kind of a different business, but there are some similarities. But it's really co-part and IAA. And IAA was spun off from calls. in about 2019.

So unfortunately, I can't pull that, you know, like 15-year comparison of the two or whatever. But you can pull a 15-year comparison of car versus cop-part. And Copart has smashed car, right? And a lot of the questions I was getting when we announced this podcast was, why is IAA so bad and co-parts so good? And, you know, just I think off the top of my head, I think coparts, EBITOM margins are about 45%. and IAs are about 30%.

And we can talk about some of the accounting quirks and ownership quirks that make that different. But obviously, that's a big difference. So I want to turn to review. This is an oligoply. It should be an advantage business. Why is Copart so much better than IAA? Or is that mistaken?

Is IAA just as good as Copart? I would argue that almost the entire difference is because the management is so much better. That would be my argument. And if you look into the history of these two companies, they've been... main competitors for something like 30 years, 30, maybe 40 years. And in the early history, maybe not early, but 90s or so, IAA made the decision to grow as fast

as they possibly could, leasing yards, just let's build capacity as fast as we can. Copart took a more deliberate approach where they would buy the land, build a foundation, build relationships first, and then the money would come later. And essentially what happened is IAA kind of crashed and burned from trying to grow too fast. Do you, you said it's because the management is so much better. And that is great, right? We've talked about how when you're trying to build these companies and buy them for the long term, like great management.

And the CEO here, you know, he's a billionaire from his. ownership, as we talked about, he's only 52. So he could be doing this easily for another 20 years. The founder, who's executive chairman currently, and also I believe the father-in-law of the CEO, which I am kind of interested. Did he join because he was married or was he so into the business? I'm interested in that dynamic always, but we don't have to have it. But the exact chairman, he's 74. So 52, 74, I mean, you've got a long runway ahead of these guys running the business. But you always worry, like, the difference between Copart and IAA is management, and you do worry, like, management can lose it. I knew somebody could go over to IA.

Like, I don't know where I'm driving with it, but Microsoft, right? For 20 years, Bill Gates was the differentiator at Microsoft. But a business that relies on the manager team will eventually be run by a ham sandwich or a monkey or something, right? And then Steve Bomber took over Microsoft, and Microsoft had a lost 15 years despite all their advantages. How much do you worry about so much of the advantage being built on Copart's management team versus, you know, I thought this was a great business, but IA is showing you maybe this business is only great because of who's managing it? Well, part of what goes along with having a management team that's been around that long is that they build up the culture of the company to the point where everyone in the company should have a similar. perspective in terms of growth and management that the management does, especially when the company founder is still involved. The other thing is that I think Copart has a pretty big advantage

by owning the yards instead of leasing them like IAA does. And Copart also has a very big head start in terms of international expansion. That brings me nicely into the two things I want to talk about. So Copart owns the yards instead of leases them. And they mentioned this on their call, and it's one of the things that jumped out to me. Most companies would go and they would lease the land to, as you said, IA did it to grow quicker. And Cobart says, hey, we go and buy the land because by doing that, we're not beholden, right? If we have a 10-year lease and we've got a really profitable lot, guess what? At the end of 10 years, the landlord comes to us and says, hey, you got to pay the piper, right? And if you buy it, and if you've got a really

unsuccessful lot, after three years, landlord says, I've got you for another seven. Whereas if you buy it, you can hold that as a profit lot for years and years and years. And if it's unsuccessful, yeah, you'll have to sell it and probably take a loss, but you're going to take a lot less of a loss than a seven-year lease. So it's more expensive and it probably brings down your returns on equity, but it's probably a safer and better way to compound capital in long term. So I had my two questions here, they buy the lots. Where should we think of these lots being, right? Like, I live in New York City. I don't think there's a used car scrap in New York City that's probably not, you know, they're probably not going to be at the center of the towns,

but are these lots valuable? Are they in good spots? Do they have lots of access to, I would guess, interstate so that you could bring part? Or are these lots kind of, hey, yeah, they're nice because they've got everything connected, but they're so far out of the city that, you know, you could build another lot two miles down the road if you wanted to. I think that's a great question, and that's something that I've heard, I think I've heard management talk about a little bit, is you're not going to find one in the center of the city, but you'll find one pretty nearby.

And I think there actually might be two of the, like within driving distance of where I am, within like 20 minutes of where I live in the city. So they're not super far away, but they're certainly not in the city center. And what's kind of great about that is when you have a city or even maybe a mid-sized town or something, there's some zoning that you have to do. If you put one scrapyard there, they might not let you put another one nearby. So you get a little bit of almost regulatory moat, right?

It's the same with the landfill, right? You get a regulatory moat because once you've got one, you really, you probably don't need a second landfill. The city probably doesn't want a second landfill. And, you know, it's similar to a cable company where the economics, you can have one and they can be super profitable. But it probably doesn't justify the economics don't justify a second one. The regulations don't justify a second one. So you get that. Have they ever, I don't know the answer to this.

So I'm just taking a sudden dark, but it could help with thinking through the real estate. Have they ever had a lot? You know, they've run it for 20 years. and then the town's grown around them, and they say, oh, you know what, this lot, the town's grown so much around us, it'd actually be better if we, like, kind of sold it and redeveloped it as condos or a mall or something. As far as I know, I don't think they have done that. And they seem like the type of management that wouldn't take that approach.

They would stick to the business that they know and they would continue operating the way that they think is best for their particular business instead of converting into something that they're not familiar with. I was, I doubt these guys are going to run a condo growing in person. I was more running if they had, you know, it does happen where the city developed so much around you. And it's like, oh, a scrapyard's not the best use. So they sold the land for a huge profit to a condo developer or something. I haven't heard of that happening.

Okay. So I mentioned that this company trades at 30 times price to earnings earlier, about a 30 billion market cap. But, you know, the thing with price to earnings is, because. they own the land, their earnings are going to be a little bit distorted versus somebody who leases the land, right? You don't really have to take rent expense on that on that land ownership. Obviously, you have to depreciate it, but it's probably going to be a lot lower, but that land has a lot of value. So how much do you think coparts, you know, if I went really crazy, if I went hardcore activists here and I said, Copart, you need to spin off all your land into a

reed and that reed's going to pay a dividend and it's going to take rent from you, like how much with that 30 billion you're paying for COBRA right now is covered by just the land that they owned. Oh, I don't know that I'd be able to get the answer to that particular question. I didn't think so. I doubt anybody, but I doubt even management could give you an exact answer. They would obviously have the best data. But, you know, I figured if anybody could tell me you'd be the guy to be able to get out there. That sounds like an Eddie Lampert thing.

The nice thing here is, you know, Sears, everybody knew the future of Sears was going to be troubled. Though, if you look back to Eddie Lampert's letters in like 2006 to 2007, he saw where the world was going very clearly, where the retail world was going. The issue is he had a very poor horse in Sears and he was not the operational manager who could, he couldn't have transformed any business, but particularly a really troubled turnaround like Sears. was not the operational manager for. But, you know, there is land value and that can be extracted that can be extracted at some point, whether it's just running these great or at some point in the future, maybe they do something. But yeah, let's turn to the international operation. So that's where I'm a little less familiar. You know, I've seen people talk about, I think the international operations aren't quite as profitable as the U.S., but I've also seen

people, and you mentioned at the start, how the international operation is just the way they work with the insurance and everything have the potential to be more profitable. So I want to ask, I'll just flip it over to you to talk about the international operations and then I'll probably have some follow-up questions. Yeah. So kind of the big opportunity internationally, they say they operate in more than 100 countries. Sorry, they say they operate in like more than 100 something countries. I don't remember the exact number.

But that doesn't mean... That's pretty crazy. It doesn't mean they have salvage yards in all of those countries. It just might mean they have people who buy cars from all of those countries. They've got one buyer in Egypt who's buying from a lot somewhere in Europe. Right. That's it. Egypt's on the list.

Yeah. I would guess that it's something like that. They have salvage yards in just 11 countries. And the big opportunity right now is the European market, which is very close to the same size as the North American market. I would argue they're basically close enough to call them the same size. And what the management decided to do was go into Germany first and get things figured out in Germany.

And once they have their business kind of expansion plans honed in and figured out in that one country, then duplicate it everywhere else. else in the rest of Europe. And it's been a little difficult for them because they have to enter this new market where they don't really exist and persuade the players in the existing market that using their service is the best option. So let me ask you a quick question there, right?

Because originally when we were talking about it, we were saying how, and we were specifically talking domestically, oligopoly domestically, be really difficult for a new person to enter. And if I flip this around and I said, hey, Andrew, I know the best salvage yard operator in Germany. They're great. 30-year track record of beating the S&P, great margins, great capital allocation, great operator. They're going to come over to the U.S. and they're going to start, they're going to do the same thing. We'd laugh at them, right? We'd say, oh, well, Copart and IAA have 85% of the market. Like, how are they going to take share?

Are they're going to go buy a couple mom and pops? Great. Good luck there. They're going to do some startups. Great. Good luck there. Right. So when Copart says they're going to do this, my first thought is, yeah, this is really

attractive. These guys have proven they kick IAs, but operationally, they're huge. But how are they going to grow this? Like, it seems like they have to do some pretty transformational acquisitions because it feels like this business has already been built out. Are they really going to be able to organically grow throughout Europe? It feels like it's built out and there's not that much market share for them. So I think the way I look at it anyway is that it's a mature business in the U.S.

But it's not as mature of a business in Europe. It's still fragmented. It hasn't consolidated yet. So they can come in and they can buy a few. And Copart has much more. liquidity in their auction space than probably anybody else. So if there's a mom-and-pop salvage yard in Germany, and I know they wouldn't do this, but say they put theirs right next to it, they could sell worldwide, and the mom-and-pop one

probably can't really sell to anybody beyond a couple towns over or something like that. you talked about it. It's that great network effect when you run a marketplace business that matches buyers and sellers, right? You are the best natural buyer because everything you buy, you plug into your system and they instantly have more buyers on the marketplace, which makes the business more value because they'll get higher realized prices. They'll get faster prices, like all of that. And it's just this great flywheel. It reminds me of, you know, Salesforce goes and buys a company for 10 times revenue. And the next day, they plug it into all their systems. and, you know, distribution goes up five X and 10 times revenue becomes two times revenue really

quickly, right? Am I thinking about that correctly? Yeah, yeah, that's exactly how I would describe it. And I guess to go back and answer your question a little bit about how the European market is not quite as profitable for them yet, I would say that it's because they're still building those relationships with the insurance companies and they're investing in the future of their business by doing this. And what they're doing is they're approaching them and they'll say our normal business is to have the insurance company just put the car up on the auction and we take a cut. But since the insurance companies are not comfortable with that, what they're doing instead is saying, we'll just buy the car from you and we'll put it on our auction and we'll

prove that you get a better price this way. So they're not making as much money doing this, but over the long term, that's going to be the right strategy. Yep. Yep. That's great. There was a line in the most recent, I think it was the most recent earning call where they said, hey, we're thinking about, an analyst said, I heard a loose competitor or something talk about ancillary service.

And I think in that case it was they're talking about offering transportation. And Copart responded, we think about this a lot. We know that there's a whole ecosystem that's built around our business, you know, and that could be all sorts of things, getting the car to our salvage yards, getting the car from our salvage yards. I'm sure there's all sorts of other things that I'm not thinking about because I'm not an expert. Is there anything on the ancillary service side that you think is low-hanging fruits? You get excited about that opportunity. Or I think a bear, a pessimist, would push back and say, hey, Cobart's been around for 30 years. These guys are economic animals. If there was a lot of

low-hanging fruit on the ancillary service side, they probably would have already plucked that. Yeah, it's really tough because when management has plans like that, they just don't like to talk about them until it's almost ready already. So for example, with their expansion into Germany, they just didn't talk about it at all for a few years. And then one day they said, oh, we should probably talk about this because it's kind of big right now. In terms of ancillary services, I haven't seen much from what they might want to do. So, in my opinion, it would be very interesting to see them expand more into used cars that are not salvaged title vehicles, just to see what would happen with that market. And I know that's a more competitive market, but it would be an interesting natural kind of expansion. So are you talking about getting into used cars a la Corvano where they're going to buy and sell used cars?

not buy and sell just offer their their auction space as a place for people to sell their cars it feels that feels a little different right because at that point i mean you're you're talking about selling it to consumers right so you're talking about a different breed of cars i mean their cars are really scraps and liquidation stuff you're talking about different breed right now they've got buyers where their buyers are people who need scrap parts or who are looking for kind of junk or refurbishes. At that point, you're talking about, you're looking for actual consumers. It just feels like a different skill set. I would say, yeah, it is a little bit different. It's the only natural expansion that I could

think of, but stuff like towing services is also possible. But in terms of what their core business is, that's the only thing I could think of. Now, obviously, you wouldn't sell a high-end car unless it's already been wrecked. And if you go on their site, you can get a Rolls-Royce. if you want to. It's totally trashed, which you can get a cheap one if you want to. I'm laughing because I feel like this is a value pod, right? Yet another value podcast. And I feel like there's some value investors who heard that are like, oh, Rose Roy's, it's trash, but I can get it at a discount. I'm here. Let's do this. A huge discount.

Last thing, I've got one last question or two last questions, actually. But before I get there, I just want to ask you, we've talked about a lot. lot. We've talked about valuation. We've talked about international expansion. We've talked about their mode. Is there anything so far that you think we should have hit a little harder that we didn't hit quite hard enough or anything that we haven't talked about that you think should be mentioned upside, downside, however you want to look at it? I think maybe the long-term trends that affect this industry I think deserve a little bit of a mention because that's definitely been a very powerful driver of their business over the past 10 or 20 years. The biggest one in

opinion is the total loss frequency, which is basically like the chance that any given accident will be considered a total loss. So you have an accident, how likely is your car going to be considered totaled? And if it's totaled, then it's going to go on Copart's auction site. And that has increased, I can't remember the exact numbers. I think it's like 15 to 20 percent over the past 10 or 20 years or so. I think you had to steal from, I believe it was your blog post, actually. It said in the 80s or 90s, 4% of cars were considered totals after Rex. If I'm remembering correctly, I've actually got the thing pulled up.

And today, because, and I'll let you talk about the drivers that have done it, it's about 20% of cars are considered totaled after Rex. Am I remembering that correctly? Yeah, I think that was somebody else's blog, but those are the numbers. Yeah. mine was just the past 20 years or so i didn't go quite back that far okay okay yeah but yeah i'm looking at your blog now you had the past 10 years it's gone from about 15 to about 20 do you want to talk about why that total loss frequency is going up yeah there's really two main reasons why

and one of them is because the vehicles on the road have gotten older on average and an older car when it's in an accident is much less likely to be worth repairing, mostly because it's not worth as much, but an older car, you wreck it. If you're thinking about it personally, you'll say, yeah, I probably wouldn't fix that. The other one is that for newer cars, fuel efficiency standards have meant that we switch more to using aluminum than steel and the people I know in the industry say that it costs more to fix aluminum damage than steel I've heard different opinions but the people I talk to said aluminum costs more and then the other one is that there are many many more electronic components

in brand new cars. And those are very expensive to replace. Oops. Yeah, no, 100% agree. I mean, I just think like my mom just got a new car and I was visiting her a couple weeks ago and driving around and she's got one of those fancy new rearview cameras, right? And it's so nice when you turn that rearview camera on, it's better than my, it's better than my big screen TV, right?

The view's so crystal clear. It's perfect. But if you got into a fender bender and it totally, out that camera, like, yeah, a fender bender that just took out that camera, yeah, you'd probably replace it, or maybe you wouldn't even replace that camera. But if you, if you got into a little bit more and it took out that camera and a couple other sensors, you can see that camera is going to be a lot more expensive to replace than like just kind of the traditional, oh, just put a new fender on it. Am I thinking about that correctly? Yeah, that's absolutely right. I think that's the way I would

look at it. If you have a normal bumper that has no camera, it's not going to cost as much to fix that as it would if you're replacing the camera. The other thing is that there's a strange psychological effect where you add a lot of electronic components that make a car safer for someone to drive. They drive more dangerously. So the accident rate stays about the same. People survive the crashes, but their cars don't. Yep, yep. And it's not even, And tell me from Runker, it's not even that accidents say, I believe accidents have been going up pretty dramatically over the past 10 years. And fortunately, fatalities haven't been going up.

But accidents have been going up because of the safety, because probably a lot of texting and driving and all that type of stuff. So, yeah. Let me ask you just on some trends. You know, as someone who doesn't know the industry perfectly, but is getting interested based on this and everything, there are two trends that jump out to me that, I don't know how they play out. The first would be electric vehicles, the rise of electric vehicles, right?

Every company, I watched the Pelicans play, the Pelicans play the playing game last night, and I was getting hit like ads left and right for electric vehicle companies, for electric vehicles from all the big car manufacturers. So I want to say the electric vehicle scrap market, I'm guessing it's dominated by the same players, but are the economics the same there? Like as we see more, as we see more electric vehicles, is Cobar going to get more profitable, left bruffles, is it kind of not even matter? I think it doesn't matter, but I think I can add a little bit of background behind that.

I think, I don't know the exact numbers, but I think the electric car market is still like 2%. I'm not 100% sure of that. I'm pretty sure it's only around 2% right now. And from a service standpoint, I'm not 100% sure of this either, but I think it's cheaper to service an electric car because it's just, a motor and some batteries instead of radiator engine and transmission and all that other stuff in terms of the actual mechanics of how it works. But from the perspective of this car is totaled, if you get in a crash, I don't think it's

that much different, but I haven't done a lot of research on it. And I actually have seen electric vehicles show up on Copart's auction, too. you could get a Porsche, I think it's the TACAN, you could get one of those if you wanted. I wouldn't be surprised if over the long run electric vehicles were a good thing for them because I think electric vehicles, I don't know, because there are less parts in electric vehicle, if I'm right, but I think electric vehicles are a little bit heavier. So I could imagine you're talking like electric vehicles when they get damaged because they've got lots of really sensitive sensors and everything in them.

They're very quickly scrapped, and because they're heavier, you get more of a local network effect for the scrapyards. I don't know for sure. That's just a hunch I have, but I'd be interested more. What about over the long term, you know, 10 years ago, all of my friends had cars, right? And I live in New York City, so it would be different now. But nowadays, you know, 10 years ago, all of my friends, if they were getting married, they would have two cars, right?

them and their wife would have cars. And nowadays, a lot of my friends who don't live in New York, they have one car. Them and their wife share a car because they can use Uber's to get everywhere. Or most of my friends who live in big cities, not just New York, but any big city, they don't have a car because they'll just Uber everywhere. So my question on that is, if car ownership is going down over time because of the Ubers and stuff, is that bad for Copart? Or would their verse be, hey, Uber drivers, Miles are staying the same. they're just all getting concentrated on the Uber drivers. So you're actually going to see Copart's business increase because you've got this.

It's more like city driving or I don't know. But how would you respond to that? That's a new one I haven't actually heard of before where people want to drive more Uber's and things like that. Maybe that's more of a high-dense city thing than what I'm familiar with. This is New York City versus St. Paul right now. Yeah. not even originally from St. Paul. I'm from a much smaller area. That's a very interesting

line of thought. It's something I'd probably have to do more research on, but my initial thought is that it probably won't have a huge impact. And something, it's a little more short term, but what's happened at least here in other cities I'm familiar with is people have stopped taking as much Uber, they've stopped taking as much public transit, and they've been driving more because they don't want to get COVID. So I'm not sure of the long-term perspective on something like that. I would guess that it's not a huge effect. I do wonder just two things on this. A, to prove that I'm not too New York City bias here, like, you know, when I used to go on business trips, I would rent a car every time. And starting about five years ago, when I went on business

trips, I wouldn't rent a car. I would just Uber to the hotel, Uber anywhere I needs to go. And it would end up being a lot cheaper and a lot easier to just Uber versus running a car for a day or two. So just to prove that I'm not completely using my big city bias. And then the second one, you mentioned something about COVID. I can't remember anymore. I can't remember the second point. But look, I think we've gone for almost an hour. I think we've covered Copart very well. I think this is a very interesting compounder type business. You know, it's funny because some of the pitches on here will come in and it'll be like, it's a binary. There's a judge's ruling coming out tomorrow and the stock's either going to go up 3x or it's going to be a zero.

And I think it's probably going to be a 3x. But then some are compounders. And you know, it's just funny to see the response in the different pitches. It's why I like the podcast. But anything else you want to mention about Copart before we kind of wrap this up? the only thing I would add is that you really want to hope that one of the vehicles you drive never ends up on their auction site that's at least the way the site is now you wouldn't want that to happen to you well that is certainly true but I would add on top of that and say you don't want it to end up on their site but it's probably better for them ending up on the site than following Andrew's lead and going and trying to rebuild it yourself yes I would agree with that too

Cool. Well, look, Andrew put up a great blog post on Copart with, there's a lot of charts that explain some of the trends that we talked about. I think we did a nice job talking about them, but you can visualize them, which always helps. I'll include a link to the blog post in his blog in the show notes, but it's Wagner Road CM.com. It is his blog. And then the book, which I didn't know about, but the book is economics of online gaming. If I've got that right, I'm going to find it on Amazon and include a link to that in the show notes. But Andrew Wagner, thank you so much for coming on. And I know you've got some other interesting things in the portfolio. I'm looking forward to having you on for the second time in the future. Oh, I'd love to. Thank you.