Junk to Gold
Copart is a leading provider of online vehicle auctions. Its focus is predominantly on salvage (i.e. total loss) vehicles that they receive on consignment on their junk yards across the United States from insurance companies and increasingly from non-insurance companies. It was founded in 1982 by Willis Johnson. The company is now run by Jayson Adair, only its second CEO. Copart went public in 1994 as it expanded across the USA. Over time, Copart has transformed itself thanks to the extensive use of technology to become a global remarketing platform that links buyers and sellers of primarily cars around the world. It sells more than one million cars every year.
Founder and Portfolio Manager
One of our selection criteria is how defensible a business is. High barriers to entry are a key factor. Copart is a good example. It has expanded over three decades to build a unique network of junk yards (in Dutch: autokerkhoven). Cities are cautious about issuing licenses to open new junk yards (“Not in my back yard”). The networking effect that comes from having the largest supply of salvage cars combined with a dense junk yard network is impossible to replicate. Also, insurance companies need a reliable partner who can process their cars quickly and help obtain the highest possible price, making it extremely difficult to enter as a new company. Copart has long-term contracts with the major suppliers of salvage cars.
The key drivers for volume of cars processed are 1) the number of cars on the road, which continues to rise; 2) the average age of cars, which is nearly twelve years now, the highest in at least twenty years and 3) accident rates, which have been increasing and 4) the total-loss rate, which has also been increasing. As the fleet ages, the value of cars decreases. An accident more quickly leads to a total-loss, also because repair costs continue to go up as a result of crumple zones, multiple air bags, sophisticated electrical systems, etc. This leads to a steadily increasing supply of salvage cars.
Pricing is either a fixed fee per vehicle sold, or a percentage of the value, plus fees for towage, title processing, etc.
Enhancing growth is international expansion, which it began several years ago. It is now active in Europe and the Middle East. It has been in investment mode for several years, generating small losses. 2015 was the year in which its international operations turned the corner as scale benefits kick in. We anticipate many years of international growth. Copart is introducing its auction model in these markets. Its value proposition is becoming clear to the relevant market participants, which is helping it to scale in countries such as Germany and the UK.
Altogether, it adds up to a reliable and steadily growing revenue base. Copart has the type of recurring revenue model that we look for.
Copart management has shown a magnificent skill at building the business over 30 years from a single junk yard, and has allocated capital wisely and conservatively, leading to sustained high return on capital. It still owns roughly 10% of shares outstanding, ensuring alignment with external shareholders. A good example of its shareholder friendliness is its frequent use of share buyback programs which have helped reduce the shares outstanding by 36% in the last 12 years.
When we judge a company’s sustainable credentials, we don’t just tick a list of boxes. Larger companies have dedicated sustainability marketing departments these days, that focus on making their company look ‘green’ and ‘responsible’ even as they face repeated ethical mishaps. We believe that it is more important to determine how a company’s business model contributes or is a solution to the challenges our society faces. Copart is a key player in recycling used car parts. It is an enabler in the efficient transfer of salvage cars from sellers to buyers such as car repair shops. And by providing perfect insight into the availability of salvage cars, it lowers the distance salvage cars need to travel on car transporter trailers to their buyers. Altogether, it decreases the use of energy, maximizes the use of used car parts and allows scrap metal to find its way to smelters to be reused.
One of the risks we see for Copart is the emergence of self-driving cars, and safety technology helping to decrease collision risk. In our discussions with management, they highlighted that if you do the math, its measurable impact is quite some years away, and likely offset by other growth initiatives. Currently, in the USA some 300 million cars are on the road. Annually, 14 million cars are sold. As of today, none of them are self-driving, and only some of the higher-end cars currently have safety technology on board such as automatic stopping. Ironically, it is the safety features that is causing a rise in accident frequency in the last few years. People feel safer in their cars, causing them to let their guard down and send that one text message to their partner... It is unknown when self-driving becomes a commonplace feature, yet even if it is close, the feature will not be built into all cars. As such, its impact as a percent of the total car park will remain low for decades to come.
Participations in the Fund are qualified for sale in the Netherlands. SilverCross Global Small-Cap Fund does not pro-actively sell participations to investors residing outside of the Netherlands.
The minimum initial investment amount is Eur 100,000. Any subsequent investments must exceed Eur 25,000.
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SilverCross Global Small-Cap Fund may be distributed through IBS Asset Management BV or through a licensed EU / EVA financial institution. Investors wishing to invest through their own advisor can do so by providing them the following ISIN code: NL0010832242.
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