目前对 CPRT 持观望态度；鉴于增速放缓及 AV 不确定性，其估值合理、并不便宜，但日后适合作为长期持有标的。

About 10 months ago, we covered Copart and it's one of the most quoted examples for a quality compounder, which is a borrowing business with high margins, high returns on capital, and operating in a duopoly.

A duopoly that it dominated for the longest time.

And with that said, their competitor is gaining market share, which is weighing on the stock. But I love that management has been super proactive about buying back shares again.

They clearly think the stock is trading at a bargain price. The last time they bought back meaningful amounts of share was more than a decade ago.

And now the new CEO who is also the old CEO Jader is back to get Copart back on track. You pitched the stock in October of last year and at that point Copart was already down 30% from all-time highs.

But as we know today, there was still some room for even more pullbacks beyond that.

And we don't try to time the market and we didn't sell because we speculated on where the stock was going to go in the next few months. But it did feel like the right decision to free up some capital by selling Copart who invested elsewhere.

And the stock has had a rough time since then, which makes the decision look preient even if it was mostly just random luck.

I mean, COA has been a 2% position back then when we bought it. And just for context, a 2% position usually means it's sort of on probation. So, we're basically not yet completely sold on it, either because of valuation or simply because we have some quality concerns.

And I think I could speak for the both of us when I say that with Copart, it was certainly the former. I think we all know the quality is quite high. But as you said, the stock was perhaps fairly valued, definitely not cheap at that point.

And if you do that for Copart, you will find out why the stock is where it currently is, which is that topline growth has been slowing down dramatically if you look at the last 2 or 3 years.

That was, you know, the major common denominator in our Biggest Loser episode just a couple of weeks ago, that stock prices tend to follow topline growth and cops slow down from just mid- teens to basically no growth at all. That's the story for today.

what is interesting for Copart, I think, is that while they have the reputation as being one of these highquality compounders, they have had these growth slowdowns before. And we're used to the software charts by now that only go in basically one direction up and to the right, but Copart is fundamentally a more cyclical business.

And so, the last time revenue growth stalled out was in 2015. But again, that was not fatal to shareholders by any means. And to be fair, it does help that earnings per share grew consistently despite some revenue volatility.

So, if I had to summarize Copart's business in just one sentence, it would probably be that Copart is a marketplace for total cars. So every year millions of cars reach the end of what you can call their useful life.

Whether that would be through a crash or a hailtorm, a flood or just because of old age um which is most often the actual reason. But most of those cars they go to an insurance company and those insurance companies are essentially Copart's main customer base.

So they want to get rid of the car and Copart takes care of that by connecting the seller which is the insurance company with a potential buyer. And buyers usually include dismantlers or recyclers, um, used car dealers, international exporters, auto repair shops, but also individual, you know, let's say hobbyists or private buyers from basically all around the world.

Many cars sold through Copart to private buyers actually end up on South American streets, for example. I think emerging markets tend to be where Copart's cars are being bought by private buyers.

So, there were definitely some cars in the Dominican Republic that wouldn't have passed the German tuf.

And I should add that in its core business, Copart doesn't take ownership of any of the cars. So it's just a marketplace that as part of its service also handles the logistics which is kind of like Amazon but for used cars.

So Copart toast the vehicles. They, you know, park them in one of their yards. They photograph them. They handle the paperwork and then they run the auction where they actually sell those cars.

Then they basically take a fee from both the seller side, so those are the insurance companies, and the buyer side, which for example could be, you know, a dealer.

And the higher the total loss frequency, the better it is for Copart because that means they're getting more cars coming into their platform. And the interesting part in the last decades is that this has been a major tailwind for Copart.

So Jay Adair who is the old and also the new CEO and we'll explain that later on in the episode. He recently said in an investor call that the total loss frequency when he started which was about 35 years ago was only 8% and today it's almost 24%.

But another interesting point that the XCO Jeff Leo made in one of his late earnings calls is that Copart is not only a passive beneficiary of, you know, an increase in the total loss frequency, but they actually help drive it upward.

So basically every additional dollar that Copart gets for a car at an auction makes it more attractive for interests to just total the car and then send it to Copart for auction.

And he sort of framed it as basically competing with the repair shops, right? Every car that goes to Copart and doesn't get into a repair shop is a win for them. So the higher the returns Copart generates, the more often it wins the right to resolve that claim instead of that car going to the body shop.

It's a great system because it also aligns Copart and the insurance companies much better. So, not only is it more profitable for the insurance business to give Copart the cars and the volume, but Copart's fees also scale with higher sales prices.

Then on the seller side, they often use, and I think I mentioned that last time, something that is called percentage incentive program. So basically that means that copot's fees is a percentage of the car sale price and buyer fees typically range from 7 to 13% depending on the car and the buyers volume.

And as we mentioned last time roughly 80% of the fees come on the buyer side not with the insurance companies. And the reason behind that is there are only about a dozen insurance companies of size.

So it's a very concentrated group of suppliers with pretty high negotiating leverage. And then on the buyer side, you have thousands of dismantlers and dealers and exporters. So it's highly fragmented set of vehicle buyers and there's little to no negotiating leverage correspondingly.

But besides the core business with insurance companies, there's also a second business called vehicle sales. Yeah. So as you said basically the vast majority of revenue comes from service revenue which is the business that we just discussed and it's called service because again you know copot is doing a lot of the logistics and they basically take on what otherwise insurance companies would need to do.

That's why they call it service. The other 15 or so% of the business come from what they call vehicle sales. So that's the part of the business where Copot actually takes ownership of a car and then sells it through its own channel.

So that model is a lot more common in Copart's international businesses and again we talked about that last time mostly that's the case because the service model is established in the US but it's not yet widely adopted in most international markets and to show international customers the advantages of selling on Copart which again primarily comes from the liquidity that the auction offers they basically buy cars outright and then sell them as proof of the model in their own auction.

And basically the goal is that over time they can convert them into the fee or the service model which is a much higher margin business for Copart and this works quite well. International service revenue is up almost 20% while vehicle revenue is dropping close to 20%.

Now obviously you might ask yourself why is it good to see revenue drop in this case vehicle revenue but the reason is that that means international markets are in fact adopting the higher margin service model which is what you want to see.

Actually, in one of the latest earnings calls, they point out Germany as an example because Germany's model is completely different from the US model. So, when a car is deemed a total loss here, the insurer traditionally pays the policy holder the replacement value minus the Rex residual value.

Then the policy holder keeps the act basically and has to sell it themselves. And that's a pretty bad model because, you know, at the end you're still sitting on your total car and you have to deal with selling it yourself.

But anyway, Copat has now convinced some of the biggest insurance companies in Germany to switch to its service model. And since Copat has less than 10% market share and actually no real competitor in Europe, this could be a huge opportunity because you don't have a duopoly which will get to in the US where basically insurers will always split the volume.

In this case, all the volume and all the growth is only going to copot in the future.

margins are already up significantly for the international business while US EBIT which is uh you know earnings before interest in taxes just a fancy term for operating profit it's up less than 4% which is not particularly inspiring while international EBIT was up 50% year-over-year so we're seeing an explosion in the operating profits from Copart's international business

moving on here how about we go ahead and continue the conversation and talk about Copart's Moes. I think there's a reason we liked the business enough to include it in the portfolio even if it was only there for a short while.

And also regarding our decision to potentially add Copart again today back to the portfolio, I think the most important thing for us to know is whether the moat is still intact.

Yeah. And I would say that the first one is still intact. And I feel like it's one of the things that everyone knows about Copart right now. And it's actually Copart's land. So, it's all the yards that they own.

I've literally heard people say they've never looked at Copart. They never looked at the company and they don't know anything about the fact that they own their land, which is kind of funny because I think like every copot pitch is initially starting with, hey, the one great thing, the one mode is they own their land and their competitors don't.

But you just can't skip that part even though it seems repetitive because again, Copart operates in the US in a duopoly with IAA. That's the main competitor and IAA doesn't own its land.

It's renting the land and as we will see later when we talk about the financials a bit more that is a major factor and there's also a limited amount of land that still can be turned into a massive salvage yard and since Copa owns 250 of such locations globally the majority of them obviously in the US it's increasingly hard to you know get the same sort of expansion in terms of yachts for any competitor.

So to some extent again this is a competitive advantage that IIEA can no longer attack and that's true today but it will also be even more true in 5 years time. And I should mention and this is kind of bullish in my opinion that Jada said in his first call back as a CEO which has happened about a month and a half ago that Copart now has enough land and no longer needs to spend at least this half a billion which it currently are spending to acquire more land.

So I think that's a pretty good sign because if you just look at the financials, $500 million is quite a significant amount even for a company the size of Copart. So for example, last year Copa generated free cash flow of 1.2 to 1.3 billion.

So even if you know the spend is just cut in half, which means $250 million of savings, that's quite a meaningful chunk for Copart.

And the second mode is something that we've seen in many businesses that we looked at and it's just about the marketplace dynamic. They launched a website and auctions in the mid '9s and just a couple years after eBay is when they did that.

And at that point, it's safe to say that most salvage yards were still running auctions in person with a guy on a clipboard probably overseeing things. And that's why Copart had a major advantage in onboarding customers. It was sort of a digital first mover.

I still remember when I first looked at Copart and I kind of asked myself why no one even tried copying them even IA um which again is their main competitor only started really getting into online auctions during the pandemic so we're literally talking 25 almost 30 years later and I think that's just a pretty good example of how mismanaged that company has been for a very long time

and anyway you know the website and also the virtual bidding system which has sort of been this innovation that Copart had turned into a massive advantage Because more biders and that's sort of the dynamic that you just described.

More bidders mean the winning bid goes higher than you know if you have fewer people bidding on an auction and higher prices mean the insurance company recovers more money which means Copart becomes the most profitable place for an insurer to dispose of a car which is what we talked about earlier and that brings in more insurers which in turn brings in more and better inventory for

Well, and and last but not least, as we think about Coparts, Moes, and you know, the advantages that insulate them from competition, we have economies of scale to consider, especially thanks to the density of their yard network.

Basically, the denser the network, the shorter the distance to the next yard when you have to pick up and tow a car.

And it's sort of like the Domino's model of trying to have as many locations as possible in population dense areas so that it's as close as you can possibly be. The delivery time is, you know, less than a few minutes. That sort of accessibility is an advantage.

Yeah. And in this case, it's actually both it's a cost advantage, but it's also about reliability. I mean, last time I think we talked about Hurricane Katrina, which was a gamecher for Copart.

It basically left hundreds of thousands of vehicles in salvage condition. And while salvage vehicles are usually a good thing for copot, too much volume at once, which tends to happen in these catastrophe events, is not that good for them because you have to handle it.

And that means you have to lease extra yards, you have to hire third party services and work many overtime hours. And obviously all of that comes at a time when the costs for yards for third party services and so on are much higher than usual.

And then in the short term that means that you know all of these vehicles they're unprofitable volume for Copart

and that's why competitors and especially IAA didn't want to go the extra mile to help back then and Copart they chose to absorb the losses and help as much as they could and as fast as they could and actually I found a quote by Willis Johnson who is the founder of Copart and he said that they wanted to prove they're not only the best operator but also the most reliable partner

and I actually think if you look at how many customers Copart still has and how they stick with them. You can still see that credit that it gave to them 20 years later because again the hurricane happened in 2005.

This was also just a year or two after Copa shifted the entire business to online auctions. So it was also a huge test for the new system and it worked out well with tens of thousands of flood damaged cars pouring into the market and Copat's digital infrastructure allowed buyers globally to bid on cars which as you said before was basically a national operation right now suddenly you have the entire world internationally you have buyers for those cars and all of that helped bypassing the logistical bottleneck of physical auction lots and after that cop established what they call a cat respon on Steam.

So, a catastrophe team basically that can help further and faster when these hurricanes come up.

And so, this was a major part of why Copart was able to win market share for almost two decades after that. Insurers trusted Copart and knew it was not only the best place to sell volume, but also a reliable company in times of crisis.

What is different now about Copart? Because there is the market narrative that the market share dynamics have changed and IAA which is Copart's chief competitor is now gaining market share.

About 5 years ago, Copart still had 70% more land capacity than IAA. Now that number is close to 25%. And I should add, if you ask yourself, well, Daniel just said 5 minutes ago that the land capacity will be a major mode for Copart even in the future.

Obviously, there's a difference between scaling land because you lease it compared to scaling land or yards because you buy them, right? Nevertheless, I got to say apparently they did a quite good job for the last few years.

But I think what the market is scared about right now is Cobat's slowdown in the US insurance volume. So basically the core of the business. Part of that can be explained fortunately because there were no major hurricans this year, which is good for society.

It's not that good for Copart. I mean talk about incentives. But even if you exclude natural disasters, the overall decline year-over-year would be about 3 to 5 percentage points.

And while Copart's volumes are declining, IA's volumes have actually been up 10%. So it's not only that fewer cars are being totaled, it's also that IAA is taking share from Copart, which as you mentioned didn't happen for, let's say, 20 to 25 years.

So what changed there that you have insurers suddenly switching over to IIAa? I mean it seems like the modes we've been discussing are still largely in place. I don't think anything fundamentally has changed with Copart.

which is again one of the major benefits of Copart is that they have this network effect reinforcing the entire flywheel. So yeah, what really has changed? Is there any reason in particular that insurers are looking to choose IAA over Copart?

That was basically the big question for revisiting Copart, right? Has anything changed? Is there anything that I I sort of missed where Copart is vulnerable? And I got to admit while there are problems and we'll get to them that anything major has actually changed

So the historical split of volumes between Copart and IA is quite uneven. So usually an insurre is not splitting 50/50 between the two but more like 75% of the volume goes to Copart and then 25% of the volume goes to IAA just due to all the advantages of Copart that we have discussed earlier.

The reason why they split volume in the first place and they're not just giving 100% of the volume to the better operator which is Copart is that they don't want to create a monopoly because obviously in that case Copart would gain significant pricing power and could increase the fees for insurance companies because they couldn't shift the volume anymore.

And the problem for Copart is that Progressive has just become the biggest US autosurer adding 2 and a half to 3 million policies per year.

Well, I think it's a really interesting structure we have here where basically on the supply side, the suppliers are so strong that they're able to do a degree of of tacet collusion and prevent either IAA or Copart from developing monopoly and whether they admit it or not something that is seemingly being done intentionally.

But the bad news is that Copart is also unlikely to win over Progressive and Progressive is the fastest growing player in town.

>> That's a problem right now. And I think you could even go a step further and say the second order effect here is that Progressive is winning share from other insurers obviously which are Copart customers.

So Copilot is basically losing volume not only because you know progressive tilts more to IIA and send more of their volume over to them but also because that volume is coming from Copart's insurance customers.

So they are losing customers to progressive and then progressive shifts even more of that volume to IIA. That's sort of the the double whammy that Copart is experiencing there.

what I think is that they have partnered for a very long time and IA has basically provided priority services to progressive. So they offer them faster vehicle pickup times and better storage slot placements and it's also willing to operate and that's the major part at quite a low margin on the progressive business.

So it was my impression that Adair indirectly at least mentioned that Copart simply wasn't willing to offer progressive very similar rates compared to IIA because he didn't particularly name them but given that they are the only lost volume and dare I mention that Copa chose not to do business with one party that's sort of the takeaway that I had coming out of that call

and you can even see in the margin that the progressive volume seems to come with quite low take rates because copa's order segment has a margin of 36%

and if you go through the filings of Richie Brothers which is the owner of IAA they say that the auto segment is somewhere the 15 to 20% range so significantly lower than Coparts

when I hear about the profit margin difference between these two companies I think the first thing that comes to mind is that old Bezos quote about your margin is my opportunity but if IAA is willing to accept a lower margin then I would very much worry as a shareholder about there being a race to the bottom bottom on pricing between Copart and IA.

And I think as Buffett and Munger would probably say, all it really takes is one ruthless competitor to ruin what is otherwise a wonderful business. And so, right now, we're only talking about Progressive, but what if other insurers started switching volume over to IIA for similar reasons? Then we have a bigger problem on our hands.

So it's not that Copart is overcharging for fees and also as we said earlier most of the fees are paid for on the buyer side. So you're not necessarily overcharging the insurance companies which is where you could lose most of your volume.

So, I'm not too worried that other insurers will start to choose IIA over Copart because of fees or price or any of that cuz again, Progressive chose IIA because they also get special treatment and sort of by definition IIA can't offer that to too many customers and you set up all the other modes that we discussed earlier.

I mean, they are still in place and I don't necessarily feel like they will

you can still rely on Copart since, in case you didn't yet know it, they own the land. all we can do basically is just look at hey how many insurance companies go over from Copart to IIA and it doesn't look like any of the ones that favored Copart in the past have done that.

However, should that change and you see insurers actually changing sides, that would be not good for Copart and also you probably can't see that before it's actually happening and then it's also priced into the stock.

I would think it's very reassuring that the share loss is primarily due to one customer if I were looking at this as a shareholder. And if you were seeing this coming from multiple customers, this might have been only the beginning of a long period in which Copart began to slowly lose market share.

And even if they stay number one on paper, it would certainly hurt the stock because the numbers would look terrible compared to the comps. And I think what will be interesting to see is whether the insurance market actually becomes a tailwind for Copart again after being a pretty strong headwind for the last few years.

There just many data points showing that significantly fewer vehicles are insured and there's obviously a pretty bad data point for Copart and Copart's own data is also proving this trend so there are more cars on the road this year than last year up to Copart but insured cars have dropped about 4%.

Even though IRA is growing, this is primarily a story of progressive shifting over generally there simply is a cyclical factor here involved with a lot fewer cars by actually on the road insured.

let me ask you, are you seeing any signs of this trend that you mentioned reversing or is it something that will only get worse in the years to come, putting more pressure on Copart's volumes?

perhaps these, you know, insurance rates become a tailwind for Copart. But I'm quite confident most likely it will be a cobalt customer. Copart has this history of very long CEO tenures.

So, it was a real shock when they fired Mike Tomlin this year. But after Willis Johnson, the founder, served as CEO for almost 30 years, you had Jay Adair take over and then run the company for 14 years.

And he's somebody who had been with Copart doing other positions since 1989. So pretty long connection to Copart.

Uh plenty of experience. And then you had Jeff Liao who took over in 2022 after serving as co-CEO with Jay for two years. And now just four years later, Jay Adair will take over again and Lial will step down.

And as far as I know, Jeff will not even be a part of the board anymore. So he'll have something of a role like a special adviser. But I'm not really sure what that means. But getting to to Copart CEO is it is a bit difficult to figure out how exactly that decision has been made.

I mean, J scheduled a call and this is basically the call I'm referring to throughout this recording today between the Q3 earnings call and last week's Q4 earnings call. They never did this in the three decades of being a public company.

Anyway, on that call, Jaya basically made sure to say that he and Jeff agreed on the decision that they are still friends and they live on the same street and all of that stuff.

But while that's all true, probably fact of the matter is that I don't think Jeff would have stepped down if things had gone great. And I also think that Jay and Willis Johnson thought the company has been mismanaged to some extent and Jay is the one who could turn it around.

Otherwise, why don't you have both people on the call? I think that would have helped to some extent. It also sounded like Jad thought there's some stuff that needs fixing at the company.

But yeah, the market dropped 8% when the news came out and that is kind of surprising since Jay took the company from a market cap of $2 billion to $30 billion.

So, you would think that there should be more excitement about this veteran CEO and company builder coming back and especially since he also said he will not be a transitionary CEO.

He's planning to stay for a decade or even longer.

I believe it was more about the fact that this transition felt like an admission that things were not going that well at the company and that doesn't help obviously when the sentiment is bad anyway

and again when we cover the company it was already down like 30%. back when you know this decision has been made um the stock was down even further and the sentiment was even worse and by now I should say the stock has recovered quite significantly it's up about 25% from its lows

and also when the news first dropped and the market reacted it wasn't immediately clear whether Jad would actually stay on for the long term or basically would just you know be a transitional CEO which definitely wouldn't have been a great sign because then you would need to look for a new CEO it would even more be a sign of we didn't trust Jeff Liao and what he with the company

now that's a bit different and you know ADA has also been quite clear again that he thinks the current narrative on Copart is just wrong and he pushed very hardly back against the idea that some customers are unhappy with Copart or likely to switch to competitors

and it was also during that call that he mentioned that spending on yachts is no longer necessary to at least the same extent so I think there's a lot of stuff that we will see in the future wasn't too clear about what that will actually

I'm really curious, did Adair say anything more about what capital allocation will look like going forward? And the reason I ask is because one of the most important changes since the last time we looked at Copart is that they started buying back stock massively.

And that could be a really positive signal, especially given their fantastic track record with doing buybacks very, very well in a way that's accreative to shareholders.

And so after actually having five straight years of no buybacks, Copart has initiated the biggest buyback program that it's ever done, at least in absolute dollar terms.

And so Copart bought back more than $1.6 billion of stock in the last two quarters with more than $1.4 billion of that coming in the last quarter at what seems like fairly rock bottom prices.

So basically what management is telling you is that they think that this stock is fabulously cheap. We use Copart as an example for how to make buybacks um in many of the presentations that we had in our community and also at events.

So finally they started buying again which probably especially for this company is a very good signal that the stock is most likely undervalued and as you said the last really meaningful buyback happened 15 years ago.

So um for the longest time they thought the stock likely is overvalued at least compared to where they otherwise could invest at capital which again to some extent has been in yachts for example.

So I think generally to me Copart is very much a story of trusting the management team both in capital allocation and also in making the right decisions to position Copart for a future of EVs, AVs and you know international expansion.

Speaking of which, another change in the management team is that Jen PCO has been promoted to president of the company and she ran Copart's UK business previously, which is the largest and their most established international market.

And I think this is just another point to the importance of the international expansion.

So, if you ask me where will they invest most of their money in the future, I think a significant chunk will likely go to the international business. Speaking of growth opportunities for Copart, with Adair coming back, what strategic shifts should we expect now?

I mean, you just mentioned the international business. So, I suspect that that will become an increasingly important focus for him and and the management team as a whole. It seems that there are three pillars that Adair wants to focus on besides a general reversion to the mean in the core insurance volume.

So, the first is the often discussed as you just mentioned international business. Again, international revenue is up 14% year-over-year. Service revenue grew especially rapidly and the international operating margin and this is sort of the most important point increased 2 and a half to three percentage points last year and that happened for quite a long while right now.

So JL really pointed out that the breakthrough in Germany makes them confident that they can now use that as a blueprint to go into other markets and sort of initiate the service model there.

Again, currently the revenue there's up 18% total. So if we assume it can grow 15% per year on average that contributes a bit under 3 percentage points to consolidated copit growth and a bit more than that to the bottom line because of you know the margin expansion that we see.

A second growth engine is what happens in the non- insurance business. So Copart has as we talked about last time what is called blue car which is for fleet and commercial accounts which basically provides tailored services such as asset recovery, arbitration and condition reporting.

And then they also have what's called cashforcars. com which is just for buying cars directly from the public. And this used to be a growth driver but it has slowed down recently.

And it didn't give much insight into why that has been the case. But he did say Another thing that we also talked about last time is what they have called Purple Wave, which is an online auction site for heavy equipment, agriculture, construction vehicles, those sort of stuff. They actually acquired it a while ago.

And then NPA, which is short for natural powersport auctions, which is doing the same. So, we're talking auctions again for motorbikes, water sport vehicles like jet skis or something like that, and even snowmobiles and RVs and golf carts.

And then the last growth pillar would be what they call technology services. So Copart basically operates what it calls title express and that's a product for getting the vehicle title released from the bank or the owner then paying off the outstanding loan.

And that's part of a business model that sits somewhere between the insurance and the whole car business.

I think the honest answer would be I'm not sure. I think there's a cyclical element to the weakness in the sector, which is mainly that the supply of at least quality three-year lease returns is at its lowest in over a decade.

And then I'm not sure what Copart plans are directly, but perhaps we could see a spin-off or something similar because it appears that Cop just doesn't have the same sort of mode and reputation in whole cost as it has in the core salvage business.

Um because again in your own salvage you're up against IIA and they win on land, they win on liquidity and they also win on the international buyer base. But then when it comes to the whole car business that's just a completely different competitive set.

So you're up against you know Mheim which is a company that we also used for some data um last time and just many of these physical auction networks that are in the business for decades that people know when they actually want to buy a good car which is not wrecked which is usually what you get on Copart.

So I don't know I could imagine some more structural change to the company. I think some quarters ago in a call Jeff Leao who was back then still CEO was asked whether the brand would need to be a different one since again Cobat is not well known to consumers and if so they're again primarily known for wrecked and damaged cars and he said that perhaps they would need a sort of rebrand and that could be again a spin-off but that's just pure speculation on my end.

Well, so what's the deal with Purple Wave and National Power Sports Auctions, NBA NPA? Did they also get dragged down by this pretty tough market environment or are they performing well?

Unfortunately, Copa doesn't disclose specific numbers for them, but they did mention that they expanded the sales force for Purple Wave specifically and made sort of a strategic decision to expand the business coast to coast, prioritizing the highest GMV market.

So I just assume this means the business is doing well or at least a believing in the future of the business. But it doesn't appear to be a core focus either because Adair again has publicly said on the call.

He didn't yet spend much time on that business and would focus on the core insurance business first and then over time go to you know purple wave NPA and those sorts of things.

and and that is that just a couple of days ago there was a rumor spreading that Copart is perhaps interested in buying CCC intelligent solutions and admittedly it's a company I know very little about but it sounds like perhaps it could help with the data aspect of Copart's business and so the deal might be related to one of these vague comments that Adair made in his July call with investors.

Although, we should say that at the time of this recording at least, the potential acquisition is just a rumor. Um, I think was started because Bloomberg reported that Copart is in talks with CCC.

And Copart's management doesn't strike me as sort of people who would overpay for such a deal, which they might need to if PE firms are already in competition.

To recap, Copart's core business is clearly dependent on insurers deciding to total cars rather than repair them. But then now you have Copart wanting to buy the company that essentially helps insurers to decide whether a car is totaled or not.

I assume Copart wouldn't intentionally or blatantly influence the algorithm to push CCC to label more cars as being totaled, even though that would be good for their business because that sounds very illegal and would destroy CCC's neutrality and credibility and and thereby really its entire product.

my question for you is what exactly do they want to gain by buying CCC? I think the first potential advantage is faster cycle time because days in the yards is one of the most important metrics for companies like Copart and IIA and those could obviously be reduced when CCC's total loss trigger directly wires cost to Copart's dispatch.

the CCC has millions of historical claims and Copart has the actual auction outcomes for millions of those cars. And so, I can see why combined that would be maybe the best business model that they could build for predicting what a damaged car will fetch.

Given that higher auction returns make totaling more attractive, a more accurate model surfaces more total losses. I do see your point on on how it can fit into the existing Copart flywheel.

it will also serve as a sort of natural hatch because it works the exact other way than copot. So if total loss frequency for example keeps climbing, cop wins and CCC's repair volume shrinks.

But if that reverses, then you have CCC's repair business boom and cop supply tightening.

So obviously since copot would be the much larger part of the business, you know, it's a small hedge, but at least the sort of dynamic where you could see some sort of advantage from that acquisition.

what would make this remarkable either way is that this would be by far the biggest deal Copart has ever done. For context the purple wave deal was in the $und00 million range and for NPA that motorbike auction business that was estimated to be around in that same range as well.

So, this would be a minimum of a $4.5 billion deal, which is essentially Copart's entire cash pile, although I'm sure they would raise some debt for the acquisition instead of burning all their cash.

And historically, Cobalt is not the type of company that likes to raise debt, but obviously in this case, they would need to because you definitely not burn through all of your cash pile just to make an acquisition.

And also referencing the a dare call one last time, he did mention on that call that if the right opportunity comes up, he would also raise that. So he would be open to it. And you know, it's just a speculation, but perhaps he had his mind on CCC when he said that back then.

And I'm actually I'm really curious about this one because as mentioned earlier, we briefly owned Copart before. So, we're both fans of the business long term, and with the price being even lower than it was last year, I wouldn't be too surprised if you ended up recommending buying it again and maybe this time for the long haul.

So, with all that said, I also remember that we primarily bought the business due to our perception of the company's quality and the expected return though just barely met the 12% target that we have or hurdle rate in your model last time.

Do you feel like buying the stock at these prices is more likely to deliver a return that clears our hurdle rate? Well, in this case, we clearly have to say that it was not only the price that went down, but the fundamentals were unchanged.

But you actually had revenue growth come down significantly and the price adjusted, right?

In this case, the stock might look more attractive because it's cheaper than a year ago if you just look at how much a share costs, but growth also slowed down. So, I've updated the DCF model that I did and the result is not totally convincing I got to say.

I mean, a total revenue growth of about 5 to 6% which is low compared to the history, but it's also close to none right now. an EPS growth of 9% thanks to some buybacks and then some slight margin expansion which um you know Copart has seen basically throughout the last two or three decades then the expected return would be about 10% from today's prices assuming an exit multiple of 20

which again if you just look at the history it might seem cheap but I do think the stock has been repraised and to some extent we won't see multiples of 40 or 50x again I think that's kind of unlikely

you solve for the growth rate of the business. So, essentially the growth rate the market currently expects Copa to achieve based on the price that the market values the business at today.

Now, given that my growth rate assumption in the normal DCF has been in the mid single digits and the results have been that the stock is more or less fairly priced today, it shouldn't come as a major surprise that the growth rate the market currently expects for a high singledigit to low double-digit return based on the reverse DCF is about 5%.

Just to give folks a little easy summary, I think it would be that at a mids singledigit growth rate over the next 5 years, you could probably expect an 8 to 10% return complemented by buybacks and things like that.

And should Copart return to doubledigit topline growth, you would probably see a very compelling return in the mid to high teens on an annualized basis.

And so if Copart basically stays at current growth rates, returns will be probably in line with the market, nothing special, which is really what we mean when we say that a stock is fairly valued and at current growth rates, which are close to nothing basically.

Obviously, you would massively underperform the market in the next couple of years, but yeah, I think that's what it currently looks like. In this case, I think the likelihood of them actually achieving and going back to these doubledigit growth rates is kind of high.

So, I would probably say there's, you know, a 40% likelihood that happens. And the base case, which would be mid single digit return, is also 40% and then you have a 20% likelihood of them actually staying in this 0 to 3% growth rate.

So I think it likely is a pretty good opportunity for people who very much like the business, always wanted to own it and sort of feel like now is a good opportunity because we are at these signal lows.

Personally, I'm not quite there yet. I don't feel like Copart is the opportunity that now stands out to me when I look at the rest of our portfolio where I immediately feel like we got to sell you know one of the companies then make it happen and buy Copart

because one of my major takeaways from for example the biggest loser episode is that we did not do too well on businesses where the revenue is declining or at least the growth rate of the revenue is declining and what I believe I do understand the reasons for Copart we just saw the management raising some yellow flags with you know the sudden CEO change and then um more or less vague statements on what Jadair the new CEO will change about the business

and we sort of saw that you know we saw it with companies like Lulu we saw it with PayPal we thought to some extent although it's different with Adobe and just sort of stops me from really being excited about the opportunity

and just sort of stops me from really being excited about the opportunity right now and again if you put me on the spot then I would say you know Copart will be a good investment going forward but perhaps not in the next couple of months but once the cycle turns

and obviously we want to invest for the long term but if I look at our portfolio I just don't see a company that I would want to sell right now in order to buy cop and we only have about 2% cash left actually a bit less than that so basically what we would need to do is sell one company and then buy copot for it

I really like Copart because it's just such a perfect epitome of why you'll hear people say that you should invest in boring businesses. But Copart's business is very intuitive and boring in the sense that it's not going anywhere.

Even though we didn't even really discuss AVs today, which does promise to at least fundamentally change how we drive and we don't really yet know how that will affect the business.

But whether human driven or automated, I'm sure that in the US in particular, there are vast highway system cars are not going anywhere in our lifetimes. And if anything, AVs could lead to a proliferation of driving and therefore business for Copart, especially with the assumption that by baking in even more technology into cars to make them autonomous, totaling them becomes easier.

So I would say that's probably my bull case on Copart. But again, with a 20 times earnings, with the accelerating growth, a CEO swap out, some of this fundamental uncertainty about autonomous vehicles, I would just agree that the stock is not obviously cheap, even though the price has come down a lot, which is counterintuitive to some people, but that's just the reality of how intrinsic value works.

And so, if we wait, we may very well be able to pick up shares at a bargain bin price and spare ourselves some of the roller coaster ride. I think the last point is what it comes down to me to where basically I would say is this a company that I need to own at some point?

And if it would be, I think it's at a great price right now to say, okay, well, maybe it gets a bit cheaper, but if I definitely want to own this business, I should, you know, use the opportunity right now to buy it and then potentially buy more when it comes down further.

I think I really enjoy looking into Copot. I like the business. I like that it's one of the most multi businesses that we looked at here on the show. And yet, as I said before, it doesn't excite me so much that I want to buy it necessarily.

And that's not because it's a boring business. I think boring business is generally a great opportunity, but I think it needs to be cheaper. But um I think that's not the case where we are currently with Copart.

I think there are still enough people who are bullish on the company so that this might not be the bottom.

If you want to buy the company, I think it is at a cyclical low and I think it could be interesting. But for the two of us, considering the companies we already have in the intrinsic value portfolio, I think we're going to pass for now.

And should the stock decline even further, I think that would be a bit of a different scenario.

Also, I should say, you know, I mentioned in the podcast here, the stock is already up 25%. So, we're not at the bottom anymore, where I think it would have been even more attractive than it is today.

Copa has been one of the best performing stocks over the last few decades, returning at 21% KGA since its IPO in 1994. And I would say there's still plenty of room to grow.

I guess the market is just uncertain about some short-term headwinds and especially about how AVs will impact Copart in the long run. But I believe those fears are mostly overblown and I think you will see just how wide Copart's mode is in today's episode.