Copart, Inc. (CPRT) came out with quarterly earnings of $0.33 per share, missing the Zacks Consensus Estimate of $0.37 per share. This compares to earnings of $0.34 per share a year ago. These figures are adjusted for non-recurring items.
Copart, which belongs to the Zacks Auction and Valuation Services industry, posted revenues of $1.07 billion for the quarter ended July 2024, surpassing the Zacks Consensus Estimate by 0.39%. This compares to year-ago revenues of $997.59 million. The company has topped consensus revenue estimates three times over the last four quarters.
The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.
While Copart has underperformed the market so far this year, the question that comes to investors' minds is: what's next for the stock?
There are no easy answers to this key question, but one reliable measure that can help investors address this is the company's earnings outlook. Not only does this include current consensus earnings expectations for the coming quarter(s), but also how these expectations have changed lately.
Empirical research shows a strong correlation between near-term stock movements and trends in earnings estimate revisions. Investors can track such revisions by themselves or rely on a tried-and-tested rating tool like the Zacks Rank, which has an impressive track record of harnessing the power of earnings estimate revisions.
Ahead of this earnings release, the estimate revisions trend for Copart: mixed. While the magnitude and direction of estimate revisions could change following the company's just-released earnings report, the current status translates into a Zacks Rank #3 (Hold) for the stock. So, the shares are expected to perform in line with the market in the near future. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
It will be interesting to see how estimates for the coming quarters and current fiscal year change in the days ahead. The current consensus EPS estimate is $0.37 on $1.12 billion in revenues for the coming quarter and $1.61 on $4.69 billion in revenues for the current fiscal year.
Investors should be mindful of the fact that the outlook for the industry can have a material impact on the performance of the stock as well. In terms of the Zacks Industry Rank, Auction and Valuation Services is currently in the top 40% of the 250 plus Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Copart's Business Model: From Scrap to Riches
Copart Inc. CPRT shares are trading lower after the company reported its fourth-quarter financial results after Wednesday's closing bell. Here's a look at the details from the report.
The Details: Copart reported quarterly earnings of 33 cents per share, which missed the analyst consensus estimate by 8.33%. Quarterly revenue came in at $1.068 billion, which missed the analyst consensus estimate of $1.081 billion. Gross profit and net income were $454 million and $323 million, respectively.
For the fiscal year ending July 31, 2024, revenue, gross profit, and net income were $4.2 billion, $1.9 billion, and $1.4 billion, respectively. These represent an increase in revenue of $367.3 million, or 9.5%; an increase in gross profit of $170.3 million, or 9.8%; and an increase in net income of $125.3 million, or 10.1%, respectively, from the same period last year.
Examining the Results: Strong Sales but Profitability Takes a Hit
Let's start with the good news. On a full-year basis, the company's global unit sales increased by almost 10%. This was driven by an increase in the total loss frequency and market share gains.
The company's U.S. business saw unit growth of more than 6% in 4Q24 and almost 8% full-year growth. This includes fee unit growth of more than 7% and purchase unit growth of almost 14%. Especially non-insurance unit volumes and dealer units did well.
In the fourth quarter, global saws increased to almost $1.1 billion. As we can see below, this translates to roughly 7% growth, slightly below the full-year growth rate of nearly 10%.
Moreover, service revenue was strong, with growth above 7% in 4Q24 and 11% on a full-year basis.
Moreover, before I get to the bad news you may already have seen in the table above, the company also saw strong pricing. While the Manheim Used Vehicle Price Index was down almost 9%, Copart's U.S. insurance average selling price ("ASP") was down less than 4%.
The company also reported strong cash flows, generating $962 million in free cash flow in its 2024 fiscal year. This is after it invested $511 million in capital. This includes an expansion of yard infrastructure (1,100 acres of new land), enhanced physical assets like 370 transportation vehicles, and investments in technology to further improve its business.
It also maintains roughly $4.6 billion in liquidity. This includes $3.4 billion in cash and cash equivalents. To make things better, the company has no long-term debt. This means, the company, which pays no dividend, has currently more than 7% of its market cap in cash, excluding available liquidity.
The Challenges: Rising Costs and Margin Pressure
Now comes the part that explains why the CPRT stock price hasn't been doing so well lately.
As you may have noticed in the table that displayed revenue growth, the company's gross profit was down roughly 1% in 4Q24. On a full-year basis, it was up 9.8%.
According to the company, the gross margin dropped by roughly 340 basis points to 42.4%. This was driven by increased costs, including $12 million in out-of-period expenses and higher salaries.
Moving down the income statement, operating expenses rose by 16.9%, driven by nearly 50% growth in G&A costs.
The good news is that while inflation is obviously a factor, higher costs were mainly tied to investments in growth.
These investments are needed, as the company is not only scaling its business but also focusing on better responses to natural disasters like hurricanes. Although these events are good for business, it is not always easy to establish efficient supply chains. This requires more land and transportation assets. This comes with higher employment costs and a wide range of related expenses.
Valuation: Is Copart Still a Buy?
The company's fourth quarter wasn't horrible. Although I would have liked better margins, Copart is performing quite well in light of economic challenges.
I believe one of the reasons why the stock price is selling off is because higher economic risks and lower margins happen at a time when the stock price valuation is quite lofty.
As we can see below, the stock has a blended P/E ratio of 35.0x, roughly ten points above its long-term average. Although CPRT has strong secular growth, this is not a valuation to write home about.
Using the FactSet data from the chart below, analysts expect 11% growth in the fiscal years 2025 and 2026. The 2027 fiscal year is expected to see 16% growth.
Although all of these numbers are subject to change, I believe they reflect the company's potential, expanding its history of very consistent double-digit growth.
If we use the company's two-decade P/E average of 26x, we get a fair stock price of $52, roughly 4% above the current price.
Its ten-year average P/E ratio is 31.0x, implying a fair stock price of $62.
However, I wouldn't apply a multiple that high, as expected growth rates are not high enough, especially in light of elevated economic risks.
Hence, I will stick to a Neutral rating, ready to upgrade on more stock price weakness. In general, I believe we're dealing with a fantastic business model here. I just don't like the risk/reward.
Conclusion: Copart's Long-Term Outlook Remains Strong, But Valuation Is a Concern
However, despite a solid performance in fiscal 2024, including significant sales growth and healthy cash flow, the company faces challenges. Rising costs and pressure on margins have impacted profitability, and the stock's valuation seems stretched given ongoing economic headwinds.
While Copart's long-term opportunities remain strong, the current risk/reward balance doesn't justify a Buy rating.
Hence, I maintain my Hold rating, but I'll be watching closely for better buying opportunities if the stock price weakens further.
