ADAS Safety Gains And Lower Total Losses Will Gradually Erode Salvage Auction Volumes

Catalysts

About Copart

Copart operates a global digital auction platform for salvage and whole vehicles, serving insurance and noninsurance sellers.

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

• As consumer retrenchment in auto insurance coverage persists, a structurally higher pool of uninsured and underinsured vehicles may bypass Copart's institutional channels. This could cap long-run unit growth even if miles driven and vehicles in operation keep rising, which limits revenue scalability.
• If total loss frequency plateaus below management’s expectations while ADAS and other safety features continue to reduce accident rates per mile, Copart could face a slow erosion of its core insurance volume engine. This may pressure long term revenue growth and operating leverage.
• International buyers currently pay materially higher prices for lighter damage vehicles. However, any shift in tariffs, freight economics or local repair capacity could weaken this arbitrage, driving lower auction intensity and compressing average selling prices and fee revenue per unit.
• Years of heavy land and capacity investment relative to recent unit growth raise the risk that yards in catastrophe oriented or low utilization markets remain underused. This embeds structurally higher fixed costs that weigh on gross margins if volume recovery is slower than expected.
• Ongoing mix shift toward noninsurance and direct buy or referral models, while strategic, exposes Copart more directly to cyclical dealer and commercial fleet behavior. This could translate into more volatile volumes and limit the company’s ability to sustain current margin and earnings growth rates.

Assumptions

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

• The bearish analysts are assuming Copart's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 34.2% today to 34.9% in 3 years time.
• The bearish analysts expect earnings to reach $1.9 billion (and earnings per share of $1.91) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Commercial Services industry at 24.0x.
• The bearish analysts expect the number of shares outstanding to grow by 0.2% 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?

• The long term upward trend in total loss frequency, which has risen from roughly 4 percent in 1980 to over 22 percent today, with management expressing conviction it will move toward 25 to 30 percent, structurally supports higher salvage volumes over time and could underpin sustained revenue and earnings growth.
• Copart is reporting all time high average selling prices and gross returns for U.S. insurance vehicles, with global insurance ASPs up around 7 to 8 percent and fee revenue per unit up over 7 percent, indicating strong pricing power and auction efficiency that can offset softer unit volumes and protect net margins.
• Expanding marketplace liquidity, evidenced by record unique bidders per auction, rising preliminary bids per lot and a growing share of pure sale units, strengthens Copart’s competitive moat, which can support higher fee revenue per unit and durable operating margins over the long term.
• International demand is a significant secular tailwind, with international buyers purchasing vehicles that are roughly 38 percent higher in value than those bought by domestic buyers and international insurance units growing when adjusted for catastrophe activity, which can diversify the business mix and enhance consolidated revenue and earnings resilience.
• Copart’s exceptionally strong balance sheet, with approximately 5.2 billion dollars of cash, 6.5 billion dollars of total liquidity and no debt, along with robust free cash flow and disciplined capital allocation into land, technology and adjacent platforms like Purple Wave, provides ample capacity to invest for growth or repurchase shares and can support long term earnings per share.

Valuation

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

• The assumed bearish price target for Copart is $33.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $39.1, the analyst price target of $33.0 is 18.5% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.