Copart CPRT

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
Vehicle suppliers have a need to dispose of a
car. They hire a salvage company to dispose of it
for them
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

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 gt 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 dismantlers, dealers,
  resale, repair, or export license

7
Sales Process

• VB2 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 VB2
• 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 VB2 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 Nations
  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 companys in-house IT skills
  and knowledge, Universal led the salvage industry
  into online E-Auctions.

21
The Deal

• Cash Purchase of GBP 57 million (US112.8
  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 owners
  responsibility to dispose of the ELV
• 2007 it is then the producers 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
1
29
(No Transcript)
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
Immediate pay off of Debt will free up 500,000
a year, or a 1,000,000 a year Instantly
increasing margins
1
7 Interest Rate Loan
34
Stock Performance
35
Stock Performance

• 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
3

• Stock Price Over Last 1 Year

38
Stock Performance
3
39
Stock Performance

• 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 S0.5872
• Sell 100 shares of CPRT S0.5867
• Sell 500 shares of CPRT S0.5834
• Without CPRT S0.5750
• Buy 200 shares of CPRT S0.5878

43
Valuation
44
Discounted Cash Flow

• Basic assumptions
• Revenues continue to show steady increase as CPRT
  continues to purchase and integrate new
  facilities
• GA 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 CPRTs performance
  only the FCFs from Universal are added
• First lets consider CPRT without the acquisition
  of Universal Salvage

47
Sensitivity Analysis
Now lets consider the addition of FCFs 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)www.universal-salvage.com
• 2)www.copart.com
• 3)http//finance.yahoo.com
• 4) www.bloomberg.com