Copart Stock Is Down -40%. When Will It Be A Buy? $CPRT

Hello everyone and welcome to confident compounding with Corey Kramer. Today

we're going to be analyzing Copart Inc. stock, ticker CPRT.

This one came in by request down in the comment section of one of my other videos. If you have a request, put it

videos. If you have a request, put it down in the comments. I go through about once a week and uh write down the request on the board and I'll let you know when I do that in the comments and eventually I'll make a video for you. Uh

the smaller companies I post on the free tier over on Patreon. Uh the link to that's down in the description, so make sure to check that out. And I have weekly picks over on Patreon, too. Um

for all the folks that say I never buy anything and my buy prices are too low.

I buy something every single week. Um

and I for $25 a month, you can get access to those on Patreon as well. Uh

as always, not individual investing advice, just how I analyze stocks. All

right, Copart. So these guys do um auction car auctions, auto auctions, I believe mostly online. Um when we look

at the fast graph here, first of all, not very cyclical over the long term. I'll go back and see what

long term. I'll go back and see what they did and sometimes you can see better. Yeah,

so earnings fell like 6% in 2009, like the worst recession ever. Um other than that, earnings have grown every single year. Also worth noting in the past 10

year. Also worth noting in the past 10 years, these guys have not bought back a bunch of stock like a lot of companies that have earnings growth this good. So,

a fantastic company over the past 20 years. And let's see, the stock price is

years. And let's see, the stock price is down. I haven't checked to see how far

down. I haven't checked to see how far yet.

Let's see.

Down about almost 40%. So, significant

uh decline off the top, which makes it interesting to make videos and chat about. Um, okay. And this one is

about. Um, okay. And this one is actually interesting because it we have a little bit of a different choice dilemma thing to figure out than

we do with quite a few other stocks. Uh,

because it's pretty straightforward. We

they haven't bought back a bunch of shares. They don't really have any debt.

shares. They don't really have any debt.

If anything, it looks like they have a little bit of cash. Um, pretty big company at $ 38 billion market cap. And

if I recall, I believe they are in the S&P 500. So,

S&P 500. So, I mean, you can't really ask too much more. It's been a great business uh for

more. It's been a great business uh for the past couple decades for sure and probably before that too. Um, but the stock price is down. So now one of the issues if we're just looking at the

valuation alone, it was trading at a 40p and now it's at a 24. So it's not like it was it was pretty expensive. Um and

it's kind of rerating.

However, if you look at the earnings growth since 2018, it's been 19.87% and there's really no adjustments to

make to this really. Um, so that's been fantastic. Now, probably got a boost

fantastic. Now, probably got a boost from COVID and things like that like everybody else. Uh, but

everybody else. Uh, but you know, it's hard to ask too much more out of them. The stock price has shown periods where it's declined quite a bit

even though earnings didn't go negative.

So, there's a 40% decline in during the pandemic crash.

Then in 2022, we got another 30, call it 35% decline.

So it has experienced these draw downs before and they've all been pretty good buying opportunities. I think even if

buying opportunities. I think even if you bought this one here in 2022, even after the 40% draw down, you made 12% a year. So that's pretty good. So really

year. So that's pretty good. So really

good company to look at one probably most people would want to own looking I would want to own it looking at these metrics as long as I paid a good price for it.

So what's the problem here? Well, the

problem is well, let me just go into actually the valuation right now. And

so, if you watched my videos before, I do this time until payback analysis in a lot of my videos, especially with steady earning companies like this, it works really well. And the idea is if you

really well. And the idea is if you bought the company, if you bought the whole business, how long would it take for the business's earnings to pay you back the amount that you paid for it?

So, uh, you know, if you just went down here and you paid, well, the total enterprise value is 33 billion. You pay

33 billion. How long would it take for the company to earn 33 billion? Um, now

I do that on like, uh, $100 scale. So, I

assume you pay $100 for it. And how long would it take you to earn back $100? Uh,

and that's what the spreadsheet set up to do here. So, if I use that 19.87% 87%

here. So, if I use that 19.87% 87% earnings growth rate and I use the current $165 in earnings which were about halfway through their

fiscal year.

That gives me an earnings yield which is the inverted PE ratio. Um so earnings over price of 4.2%.

Now if that 4.2% grows well the way to think of it is if you bought the business for $100 you would earn $4.20 20 on your $100 per year and you want to

know how long it would take to earn back your 100 bucks. But I also assume that that $4.20 grows at nearly 20% a year for that that time. So that compounds

and it makes things a little harder to calculate, which is why I have a spreadsheet to help me. So the first year, if we include the growth, you earn $5.3. The next year you earn $6.3. The

$5.3. The next year you earn $6.3. The

next year you earn $723.

And if you just kept all that money, it would take you about nine years, just under 10 years actually, to earn your money back, which is usually where I

would buy a stock. So the question is, so that's usually kind of the threshold where I would consider buying something. So I'm sure somebody watched

something. So I'm sure somebody watched a bunch of my videos and they said they did a little math on Copart and said, "Hey, this looks like a good buy based on their earnings growth the past 10

years." and they are correct, but I

years." and they are correct, but I haven't bought it. So why? Well, this

now my default method is exactly what I just showed you. I'll look at the past 10 years or if I prefer to have a recession in there, but even if we go back to 2008, they barely had earnings

decline during a recession.

So, but we always have to zoom out and ask ourselves, is it reasonable to think that this company can continue to grow at nearly

20% a year for the next 9 years in a row? Um, or at least average that growth

row? Um, or at least average that growth rate over the next 9 years. And so, the issue right now is they're only expected to grow 4% this year. And I just went

and the last time I had updated this, they were expecting a $1.70 this year.

and now it's down to $165.

So, it's actually getting a little more pessimistic as the year goes on. Um,

which helps explain the stock price decline. But then analysts are only

decline. But then analysts are only thinking 6% and 7% growth over the next few years. So, you're looking at maybe

few years. So, you're looking at maybe like if these turn out to be right, like 6% growth a year, we'll call it.

That's a big difference between 19 or 20% and six and 7% growth per year, especially when you start compounding things.

So, we need to then ask ourselves, okay, what's what's more reasonable to use?

Yes, they have a great track record, but we also need to realize that this is a 40 almost $40 billion company, and businesses have life cycles. And I'm

going to pull up my life cycle graph that I haven't used for a while.

And we'll try to move myself mostly out of the way here. Maybe I can scooch it over a little bit. There we go. Okay.

So, there's a lot of stuff in here that you don't necessarily have to pay attention to. Um, but this is kind of my

attention to. Um, but this is kind of my standard setup, a way to think about it.

So we have the for successful business publicly traded businesses this is kind of what the cycle looks like but the spacing of the timing of each stage of

this is varies it's not evenly spaced uh like it is on the graph. So with that said, usually we have like a preIPO, you know, uh the private startups or

whatever and then this they're usually not earning money and but maybe they have some revenue growth eventually and so they have an IPO and so they're growing revenues and then eventually at

some point after they go public they start earning real money and it's growing very fast. Um that's the green line, their earnings growth. So after

that initial super growth, you know, like the first few years, they go into like profitable kind of growth mode. And

so this is like 15% a year earnings growth. Um, and then eventually though,

growth. Um, and then eventually though, and that's where this is where Copart's been for the past like 20 years. Um, so

they spent a decent time amount of time here. And then after that you get into

here. And then after that you get into this more like six to 15% range of earnings growth and that's steady

growth. So to me the market is right now

growth. So to me the market is right now pricing this stock like it's at the pretty far along in the

steady growth phase I would say. Um and

then after steady growth then you have kind of mature growth or no growth like low no growth. And during this time, usually the companies are paying out dividends. They're returning money to

dividends. They're returning money to shareholders because they filled their market space and they can't easily grow doing the same type of things that they

were doing before, right? Um, and at this at this period of time, they usually are hopefully giving money back to investors if they can't grow. Um and

then eventually that wears out and there's competition or changing consumer tastes and earnings decline and ultimately long-term you know they

become Sears or Kmart or something. So

the question really here is where do we want to put Copart in this? We know

they've had this profitable growth period that's been fantastic.

Um, now I think there's probably not too much debate that when you look out over the next 10 years, they're going to be

probably in the steady growth area, but it's a pretty are they at the beginning of that where they're growing 10 to 15%

or are they closer to the end? like did

they did they spend a long time in this profitable growth growth period where they're growing over 15% a year and then kind of gap down uh to say 6 to 10%

earnings growth a year. In that case they're farther toward the end of this steady growth phase. Now obviously

yearbyear it can fluctuate and everything. So this is just kind of

everything. So this is just kind of averaged out. But it's meant to give a

averaged out. But it's meant to give a picture of kind of life cycle specifically for situations like this honestly because if you buy a company thinking if you buy a company that's in

the middle of steady growth and you think they're in the middle of profitable growth you're probably going to pay too much. [laughter]

Um which is what people with Copart have done the past few years almost certainly. The ones that were paying uh

certainly. The ones that were paying uh 40 PE had to be expecting 20% earnings growth a year to justify that.

So, and they're paying the price now with a lower stock price. Now, the folks 20 years ago that did that are not. They've

made tons and tons of money assuming they held the whole time.

So, this is kind of what we need to decide as investors here uh with this stock. Let me move this out of the now

stock. Let me move this out of the now that I've chatted about that. So the

question kind of is okay what business are these guys in and like how much of the how how big can they really go? So I did

just a little AI question see how much market share they had and basically for the global the global salvage auction

market they have 40%. same in the US.

And then uh overall car auction market, if you take in every single type of car auction, they're more like 16 17%. So I

suppose in theory they could um expand there globally, but I think the easiest markets they've

probably filled. So, if they're going to

probably filled. So, if they're going to grow more after this, it's probably going to have to be in some new product or service or something new is going to

have to come along. Um, if you're talking serious growth, uh, earnings growth going forward. So, it'd be interesting to plot this over time. I

didn't do it. May I don't know if sometimes sometimes the questions I want AI to answer, they don't really have aren't very good at. Um, but this was a pretty basic one, but that might be

worth looking at. You could see how quickly it's taken them to get up to that 40% uh market share. So, they're dominating their market and that's great. So, that

probably is good for the stability of the business, but not necessarily the growth. Um, which means you want to be

growth. Um, which means you want to be really careful about what you're paying for it, even though it's probably worth buying at some price.

Um, so with all that said, what sort of earnings growth weight rate do are we willing to kind of pay for here? Um, and

what kind of strategy might we want to use to to buy it? Well,

I can test like different earnings growth rates. So, which is what I did.

growth rates. So, which is what I did.

And I thought that so if we use a 10% earnings growth rate, we're looking at a 13-year time until payback, which is actually better than

the market, the wider S&P 500 right now.

If we use 6%, you're at about 15 time. That's about

where the S&P 500 is. maybe seven maybe if you they might be going with yeah probably like seven% earnings growth is how the market is pricing this stock

right now relative to the other stocks in the S&P 500. Um so

it's not as cheap as it looks if they only grow earning six or 7% a year. So,

I think what I would do is because I do they I wonder if they were paying a dividend yet. I'm guessing probably not.

dividend yet. I'm guessing probably not.

No, they haven't started paying a dividend yet. They might want to think

dividend yet. They might want to think about it if they don't find new ways to grow. Um because I think we're

grow. Um because I think we're potentially getting close to that stage, but they aren't yet. It can also be a tricky time for capital allocation and management

because when sometimes especially if the stock falls another like 20 30 40% investors get upset and they demand

things and they demand growth because they overpaid for it. It's not the business's fault. That's just I mean you

business's fault. That's just I mean you can't ask a business too much more that's taken 40% of the share of their business in the world or whatever. So,

but it can put pressure on management to go out and do dumb things sometimes uh to overpay for stuff to get into industries they don't know enough about.

Um so you want to watch for kind of silly M&A or just skeptical be skeptical about that.

um the better situation might be for them to start some kind of dividend or a special dividend um every now and then for the investor just for running the

auction business and making money off of it and giving that back to investors.

But we'll see what happens with that.

So, I think my strategy here would be to not buy it and assume they're going to grow 19%. But if we take a 10% earnings

grow 19%. But if we take a 10% earnings growth growth rate um at $25 a share,

that would be a pretty good valuation.

Uh and but I think at that situation because growth is slowing, we're not in a recession or anything either. Uh

because the stock price is falling with no sign of recovery yet, I would want to also have positive momentum. So, I would probably want the stock to go down, make some kind of a bottom, and then on the

way up, if it's at 25 bucks or maybe a little over 25 bucks, assuming earnings haven't picked up, assuming we're still looking at a $165 a share, um, and expectations are still

like six, seven% earnings growth. all

those assumptions. I think $25 a share with some positive momentum, some signs there might be a bottom in the stock price. Uh would be a place to take a

price. Uh would be a place to take a small position and then otherwise I'd probably wait till like $20 a share

before I started buying. Uh which is 50% lower from here. I'm It's significantly lower but defin What was it back here? Yeah, so

we're at 20. that 25 mark is probably good like oh it was just above 25 and 2.

So, if you say, okay, maybe there's some technical resistance here, maybe pay like 26, right? Um, and you might have a chance to bottom tick something if it does something similar to 2022. But I

would be very aware that it could go deeper than that. I think definitely get down to to 20 um in a like a bare market, you know, or if earnings if this

slow earnings growth tilts to negative, you know, the market that can flip a whole other switch, right? Uh and when everybody when you

right? Uh and when everybody when you get down to where everybody that's bought in the past like three years is underwater, then the negativity tends to tends to

build up. So it might seem like it can't

build up. So it might seem like it can't go lower and if they if earnings growth picks up it probably will form a bottom but

20 it's not cheap here. 24 PE isn't cheap for sub 10% earnings growth. Um so

yeah that would be my strategy. look in

that 20 to 25 20 to $26 range. And

that's where things kind of get interesting depending on, you know, maybe the outlook of what's happening.

Um, and I I just wouldn't price in more than 10% earnings growth over the next decade because they already have so much market share. The odds of them making

market share. The odds of them making some kind of mistake are higher and so forth. Um, but yeah, good stock to look

forth. Um, but yeah, good stock to look at, good company. I wish I would have bought it a long time ago, uh, but I didn't. [laughter]

didn't. [laughter] All right. If you found this useful, hit

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