Presentation on theme: "Copart (CPRT) Dan DeRose Jr., Ashley Qiao, Chris Ehley Presented April 19, 2007."— Presentation transcript:
Copart (CPRT) Dan DeRose Jr., Ashley Qiao, Chris Ehley Presented April 19, 2007
Presentation Outline Company overview Market overview Firm strategy and development Universal Salvage Acquisition Stock Performance Portfolio fit Valuation DCF Recommendation
Copart – The Business Salvage company arranges for transportation of vehicle to facility and customarily pays advance charges (towing, repair facility charge) Salvage company adds vehicle/parts to inventory and attempts to resell them customers Salvage company sells vehicle to registered buyers. They are reimbursed for advance charges and receive compensation for selling vehicle Buyers must apply for salvage title Vehicle suppliers have a need to dispose of a car. They hire a salvage company to dispose of it for them
Copart – The Business Suppliers Financial institutions, vehicle leasing companies, automobile rental companies, charities, automobile dealers, insurance companies 83% of vehicles from insurance companies 14% from State Farm Vehicles either damaged in accident or stolen and claim already paid If in accident, deemed total loss if repair cost > ACV - salvage value
Copart – The Business Customers Registered buyers: vehicle dismantlers, rebuilders, used vehicle dealers, exporters Pay an initial registration fee and an annual fee Provide personal and business information and in some cases have a vehicle dismantler’s, dealer’s, resale, repair, or export license
Sales Process VB 2 – Virtual Bidding Second Generation Internet based auction-style model with registered participants Shows highest current price, enter highest amount willing to pay, BID4U feature will incrementally bid for you (EBAY) Affect: increased pool of available buyers and added competition FY 2006 – 50% of sales made to out of state buyers (24% out of country)
Sales Process Flexible Vehicle Processing Programs Percentage Incentive Program (PIP) – sell all salvage vehicles at a predetermined percentage of sales price Revenues directly linked to sales price Provide transport of vehicle to facility, storage, DMV processing at no expense Fixed Fee Consignment – generally $50 - $175 Charge extra for transportation, storage, processing
Complimentary Capabilities CoPartFinder – search engine enabling users to locate used parts quickly and efficiently Lists vehicles recently sold through VB 2 Allows vehicle dismantlers and resellers to streamline parts sale process and access a large pool of buyers (incentive) Virtual Insured Exchange (VIX) – venue for insurance companies to enter vehicle into live auction to establish true value ProQuote – proprietary software service that assists suppliers in vehicle claims evaluation process by providing online salvage value estimates
Complimentary Capabilities On-Demand Reporting Provides suppliers with reports online, via fax, or email that summarize gross and net returns on each vehicle and service charges allowing suppliers to easily monitor salvage vehicle process DMV Processing Developed a computer system which provides direct link to DMV computer systems in several states allowing Copart to expedite processing of vehicle title paperwork Off-Site Sales Vehicle suppliers can sell any vehicle, boat or heavy equipment, without transporting it to a facility
Firm Strategy and development Acquire and develop new salvage vehicle facilities in key markets Opened 11 facilities is FY 2006 and 10 in FY 2005 Pursue national and regional vehicle supply agreements Primarily with insurance companies Expand service offerings to suppliers and buyers Expand offerings to include offering software that can assist suppliers in expediting claims and salvage management tools that integrate databases Refine VB 2 and continue to integrate into acquired facilities
Market Overview Road congestion Between 1982-2002, miles traveled increased 79% while highway lane miles increased 3% Congested roads grew from 34% to 58% during same period Current situation 2000 Federal Highway Administration report states “the average annual Cost to Maintain Highways and Bridges projected for the 2001- 2020 period is $11.3 billion (17.5%) higher than 2000 expenditures, while the Cost to Improve Highways and Bridges exceeds current spending by $42.2 billion (65.3%)” “ Comparison of Spending and Investment Requirements”, 2002 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performance.
Market Overview Automobile design Manufacturers are incorporating certain design features that increase passenger safety Unibody construction, passenger safety cages with crumble zones, plastic components, airbags, and computer systems Safety features will make it more likely for vehicles to be deemed total losses if involved in accident Gasoline prices Shrink margins under PIP program Significant increases could lead to reduction in miles driven per car and a reduction in accident rates
Important Acquisition Entire New Market First foreign investment Size of Acquisition 114 million dollars cost Universal Salvage currently makes revenues of ~21% of Copart With acquisition, would make up ~17%
Universal Salvage Universal Salvage is UK based and manages the collection and disposal of vehicles for Clients. These vehicles include accident-damaged cars, commercial vehicles, and motorcycles; low value vehicles sold on a fee basis; and End-of-Life, and tax default vehicles Auction: indoor, outdoor, and Internet Vehicles that can not be sold are recycled at in- house recycling facilities
Universal Salvage (Cont) Clients Motor insurers Car retailers Motor manufactures Local and public authorities Private car owners Fleet intermediaries and operators Important Facts A fleet of over 100 transporters and recovery vehicles. More than 150 acres of secure storage facilities. The industry's most sophisticated IT infrastructure. A dedicated in-house contact centre. Sites fully compliant to Annex 1 of European End of Life Directive
Universal Salvage (Cont) IT 2005 Universal launch its new online real time IT management system making it available to all its partners to manage their own salvage. Universal rebrand the business revitalizing its look and the company ethos. 2000 Utilizing the company’s in-house IT skills and knowledge, Universal led the salvage industry into online E- Auctions.
The Deal Cash Purchase of GBP 57 million (US$112.8 million), $4.4 million in debt assumption 100% Ownership No set date: “deal to close in Copart's fiscal quarter ending July 31, 2007”
Confident in Completion of Deal No threats or signs of competitive bids 27% of shareholders agreed to deal regardless of higher bids Cash Offer– no threat of acquirer share depreciation, attractive Market agrees trading very near 200p 3
Risk environment Scrap prices Scrap Prices have been on the rise Good for recycling end of business of Universal Salvage Entirely New Market (UK) Laws very similar, however environmental laws becoming more stringent Make new relations with suppliers and clients
Legislation – End of Life Directive 2 million vehicles come to the end of their useful life each year in the UK Up until 2007 it is the last owner ’ s responsibility to dispose of the ELV 2007 it is then the producer ’ s responsibility to provide free take back of all ELVs at Approved Treatment Centres. Universal is part of the Caretakeback Approved Treatment Facility (ATF) network No business is like government enforced business!
Currency Risk Although not certain, we believe the bid price was set at a locked currency rate British Pound has appreciated against the dollar Good for Copart. Increase in real value of income Neutral for Universal Salvage, as there is no indication of exports/imports Has not enough appreciated enough to put deal at risk
Our Verdict Like the buy of Universal at a 6% premium (~ 22 cents a share) Copart will be able to stream line the company, increase margins, and payoff debt. We have great confidence in Coparts managers. As they have made many successful acquisitions in the past.
Verdict Cont IT infrastructure already present Should Allow for immediate implementation of Copart software Margin Improvement Universal still has physical “on-sight” at three of their locations Reducing expense, especially Administrative Sell off of recycling centers? Heavily Dependent on Scrap Prices
RCPM Portfolio History Purchased at $7.82/share for 1,000 shares on Feb 28, 2003 Cost of position: $7,820 Current price: $28.86 Market value of position: $28,860 (269.05% appreciation in 3 years)
Stock Performance Financial Figures Market Cap is 2.63B P/E (ttm) is 21.25 EPS (ttm) is 1.36 Revenue (ttm) is 400.80M Operating Margin (ttm) is 37.74% Profit Margin (ttm) is 23.19% Beta is 1.20 52 week range: $23.51-31.42
Stock Performance Stock Price Over Last 1 Year 3
Portfolio Fit Sharpe ratio: a measure of the mean excess return per unit of risk in the portfolio With CPRT: S=0.5872 Sell 100 shares of CPRT: S=0.5867 Sell 500 shares of CPRT: S=0.5834 Without CPRT: S=0.5750 Buy 200 shares of CPRT: S=0.5878
Discounted Cash Flow Basic assumptions Revenues continue to show steady increase as CPRT continues to purchase and integrate new facilities G&A decreases slightly over time as installation of VB2 becomes complete Must still maintain staff to service/upgrade Vehicle pooling costs increase slightly due to increases in gas prices and towing costs Under Percentage Incentive Program, can not pass these costs onto customer resulting in smaller margins
Discounted Cash Flow WACC Beta = 1.20 Rf = 4.75% Rm = 11% CAPM = 12.3% Although this number adequately captures all the risk of the stock, we believe equity holders would require a return closer to 13%
Sensitivity Analysis Lets consider two scenarios Same assumptions are used for CPRT’s performance only the FCF’s from Universal are added First lets consider CPRT without the acquisition of Universal Salvage
Sensitivity Analysis Now lets consider the addition of FCF’s with Universal
Risks Gas Prices Less travel, squeeze margins Difficulty integrating facilities A large supplier, like State Farm, takes their business elsewhere Only committed to 60-90 day contracts with regional offices