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Copart (CPRT) Dan DeRose Jr., Ashley Qiao, Chris Ehley Presented April 19, 2007.

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Presentation on theme: "Copart (CPRT) Dan DeRose Jr., Ashley Qiao, Chris Ehley Presented April 19, 2007."— Presentation transcript:

1 Copart (CPRT) Dan DeRose Jr., Ashley Qiao, Chris Ehley Presented April 19, 2007

2 Presentation Outline  Company overview  Market overview  Firm strategy and development  Universal Salvage Acquisition  Stock Performance  Portfolio fit  Valuation DCF  Recommendation

3 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

4 Company overview

5 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

6 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

7 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)

8 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

9 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

10 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

11 Firm strategy and development

12 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

13 Market overview

14 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.

15 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

16 Universal Salvage Acquirement

17 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%

18 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

19 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

20 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.

21 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”

22 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

23 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

24 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!

25 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

26 £/$ 3

27 1

28 0.9 0.58%18.2%9.09%7%1.60% 1


30 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.

31 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

32 Margin Improvement 1

33 Debt Payoff ~ 7% Interest Rate Loan Immediate pay off of Debt will free up ~ 500,000£ a year, or a 1,000,000$ a year Instantly increasing margins 1

34 Stock Performance

35  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)

36 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

37 Stock Performance  Stock Price Over Last 1 Year 3

38 Stock Performance 3

39 Portfolio Contribution

40 Portfolio Fit

41 Portfolio fit  Correlation matrix

42 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

43 Valuation

44 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

45 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%

46 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

47 Sensitivity Analysis Now lets consider the addition of FCF’s with Universal

48 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

49 Recommendation

50 Hold!  We are very bullish on this stock However: Still uncertain with outcome of Universal Salvage Copart is trading at a premium currently

51 Questions?

52 Sources  1)  2)  3)  4)

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