Global Salvage Demand And Total Loss Trends Will Drive Powerful Long Term Upside

Catalysts

About Copart

Copart operates a global, always-on digital marketplace for salvage and whole vehicles, serving insurance carriers, dealers, commercial fleets and consumers.

What are the underlying business or industry changes driving this perspective?

• Persistent increases in total loss frequency over multiple decades, supported by rising vehicle complexity and parts inflation, are expanding the pool of salvage and repairable vehicles flowing through Copart’s marketplace. This drives structurally higher revenue and earnings power over time.
• Growing international demand for higher value, lightly damaged vehicles, with overseas buyers consistently paying more than domestic buyers, reinforces Copart’s global pricing advantage. This supports continued growth in average selling prices, fee revenue per unit and gross margin.
• Expansion of noninsurance and whole car channels such as dealer, rental, fleet and financial institution volume, along with consumer sourcing via Cash For Cars and BluCar, broadens Copart’s addressable market beyond insurance totals. This creates a more diversified, higher throughput revenue base.
• Ongoing investment in yard capacity, logistics, live auction technology and data-driven tools, combined with shorter cycle times and lower logistics costs, increases effective processing capacity without a proportional rise in operating expense. This supports operating margin expansion and stronger net income.
• Copart’s auction liquidity, evidenced by record unique bidders per auction, rising preliminary bid activity and a high pure sale mix, deepens its competitive position. This may sustain auction returns for consignors and encourage further market share gains that can compound revenue growth and earnings over the long term.

Assumptions

This narrative explores a more optimistic perspective on Copart compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Copart's revenue will grow by 9.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 34.2% today to 32.3% in 3 years time.
• The bullish analysts expect earnings to reach $1.9 billion (and earnings per share of $2.0) by about December 2028, up from $1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 40.0x on those 2028 earnings, up from 23.5x today. This future PE is greater than the current PE for the US Commercial Services industry at 24.3x.
• The bullish analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent declines in global insurance units, including an 8.1 percent drop in the quarter and a 9.5 percent decline in U.S. insurance volumes, could signal a structurally smaller flow of vehicles mediated by insurers if more accidents fall outside traditional coverage channels, which would pressure revenue growth and constrain Copart's long-term earnings power.
• A cyclical or prolonged increase in uninsured and underinsured motorists, driven by consumers reducing or foregoing collision coverage in response to past premium hikes, may permanently divert a portion of total loss vehicles away from insurer mediated channels into less efficient consumer pathways, which would limit fee revenue per unit and compress net margins.
• Advances in vehicle safety and ADAS technology, which have reduced accident frequency per mile traveled over decades, could increasingly offset the benefit of rising total loss frequency if accident rates continue to trend down over the long term, resulting in fewer salvageable vehicles entering Copart's marketplace and slowing unit driven revenue and earnings growth.
• Softness or prolonged volatility in used vehicle values, parts pricing, tariffs and repair costs could reverse the current trend of record average selling prices and high insurance auction returns, leading to lower auction proceeds for consignors that might compress Copart's fee revenue per unit and reduce gross margin expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Copart is $65.0, which represents up to two standard deviations above the consensus price target of $48.89. This valuation is based on what can be assumed as the expectations of Copart's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $6.0 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 40.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $38.69, the analyst price target of $65.0 is 40.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.