Copart operates the world’s largest online marketplace for salvage vehicles. Insurance companies, dealerships, dismantlers, and exporters use Copart’s platform to buy and sell damaged, totaled, and used vehicles. Despite being unglamorous, the salvage auctioneer has compounded at an astonishing CAGR of over 17% since its IPO in 1994.

However, the company has run into some headwinds recently, and the stock market has punished the stock severely. Being down over 30% in the past 12 months, the question becomes: Is something fundamentally wrong with Copart?

This question is complex because there are multiple headwinds affecting Copart simultaneously. One of the headwinds is an unfavorable insurance environment. Copart gets most of its vehicles from insurance companies. When an insurer determines that a vehicle is totaled, they utilize Copart to handle the selling of the vehicle.

The problem Copart is facing is that fewer people are carrying automobile insurance. Due to rising premiums and many people struggling with rising prices overall in the economy, more people are going without insurance. Fewer people with insurance puts downward pressure on the number of vehicles that Copart can sell, as uninsured drivers are unlikely to utilize Copart to sell their vehicles.

The other insurance-related headwind is that Progressive Corporation has been gaining share in the auto insurance market and has been allocating a greater portion of its salvage volume to Copart’s competitor, IAA. This shift in allocation can reduce the volume of vehicles flowing to Copart.

Will these insurance-related headwinds continue? I believe it is unlikely. With regards to the higher number of uninsured drivers, a lot seems to depend on the economy. A strong economy with wages rising faster than inflation would likely lead to an increase in insurance coverage, but trying to predict the short-term economic future is something I have no interest in attempting.

However, I do think that this is likely to at least stabilize as a headwind. Carrying vehicle insurance is a legal requirement in the USA. There are only so many people who are willing to consider driving without insurance. Most people carry insurance because it is a requirement. Therefore, at some point, I believe the rise of uninsured drivers will plateau, and in time, this trend will likely reverse. However, exactly when that occurs is, unfortunately, hard to predict.

With regards to Progressive, there are reasons to believe this headwind won’t continue either. Insurance is extremely competitive. Progressive has done an impressive job of winning market share, but insurance companies tend to be very responsive to one another. In time, other insurers may lower premiums to try to compete more rigorously. This has generally been the case with insurance, and I expect it to continue.

Therefore, neither of these insurance-related headwinds seem to be something which should continue for the long term. Copart is suffering now because of them, but these headwinds at some point should dissipate at the least, and potentially even reverse and become tailwinds if more people get insurance and if Progressive’s competitors take back market share.

Technology is another, longer-term and more serious headwind. Driver safety technology has helped to reduce accidents. This is, without a doubt, a very good thing for society, but fewer accidents lead to fewer cars that are totaled and sent to Copart. Autonomous vehicles, though not very meaningful yet, will also be a long-term headwind as they are safer on average than humans.

Improved technology leading to fewer accidents is a headwind for Copart that will continue. Driver assistance and safety technology will continue to improve. Furthermore, as time goes on, fewer older vehicles that lack many driver assistance and safety features will be on the road, replaced by safer vehicles with more features. Thus, there should continue to be fewer and fewer accidents.

While this is a real and significant headwind, it needs to be put into perspective. Copart has been dealing with this issue for decades as cars have been getting safer. Furthermore, safety improvements tend to be gradual and steady rather than dramatic. Autonomous vehicles could dramatically reduce car accidents, but given the expense of them, it is likely still decades before they replace most cars on the road in the United States since, it needs to be remembered, new technologies only gradually populate the roads as older cars get retired and replaced by newer ones.

Additionally, technological advances also act as a tailwind for Copart. Advanced safety and driver assistance features are costly to repair. Even what appears to be a minor accident can cause serious damage to cameras and sensors which require specific training and tools to fix, making repairs more expensive. While advanced technology can lead to fewer accidents, it can also mean that a greater proportion of accidents lead to insurance companies declaring the cars totaled rather than paying to have them repaired. This dynamic will likely be especially true of cars with autonomous driving capabilities.

The biggest and most serious headwind Copart has faced is increased competition. IAA, Copart’s biggest and only major competitor, had offered rather poor service for years. Copart had a major advantage in terms of the service and reliability that it offered to insurance companies, especially in its ability and willingness to handle a surge of salvaged vehicles that occur after a natural disaster like a hurricane. In short, Copart was able to take market share without having to rely on lower prices by being significantly better run than its competitor.

However, in 2023, Ritchie Bros. bought IAA. RB Global, as the combined company is now called, has proven to be a very capable operator. With its new ownership structure, IAA has seen a resurgence in its business and the quality of service it offers. It has been able to compete much more rigorously with Copart.

This headwind is one that seems to be long-lasting. Copart retains the advantage of scale and still is an excellent operator, but its gap with IAA in terms of quality has shrunk dramatically. Furthermore, because insurers don’t want a monopoly, they have an incentive to balance out their business between the two rivals, meaning that the now much more competitive IAA is unlikely to give up significant market share to Copart. The days of easy market share gains from IAA are likely over.

This new competitive dynamic is a thesis changer in my opinion. Part of the thesis some, including myself, had for Copart was that the company was the dramatically better operator in a duopoly. The duopoly market structure remains, but Copart’s advantages over IAA are now much more limited than previously.

This does not mean that Copart can no longer be successful. Market dynamics remain favorable as a duopoly, and given the difficulty of setting up new salvage yards near populated areas, it is unlikely that any new significant competitors enter the market. Copart has also been growing in other markets. While international markets remain less than 20% of the company’s revenue, international markets have much more green space for growth and have helped to offset some of the headwinds that Copart has been facing in the USA.

The other major development with Copart that raises a serious concern is that the company just announced that their Executive Chairman and former CEO, Jay Adair, will be replacing the current CEO, Jeff Liaw, at the end of July. The problem is not with the incoming CEO; he is very capable and did a wonderful job when he was CEO. Rather, it’s that the need for the former CEO to return signals that perhaps the challenges Copart is facing are greater than many realize.

As I explained above, while the insurance headwinds are serious, they seem temporary. Therefore, my hunch is that Copart feels that their operational advantages over IAA have shrunken considerably, a situation that has prompted the return of Adair as CEO. Perhaps the company became complacent during the years when IAA was struggling and hasn’t been prepared to face the newly invigorated IAA.

Copart remains a high-quality company. However, given increased competition from IAA, its future growth will likely be slower than before. If the insurance-related headwinds abate, it should be able to grow faster than the past few quarters, but I would be surprised if growth in the next ten years is as strong as the last ten.

Thus, the company’s profile has shifted from a fast-growing compounder to a more moderately growing but still quality company with a strong moat—albeit one that now has serious questions around it concerning the upcoming CEO change.

Disclaimer

This publication is for informational and educational purposes only and does not constitute investment advice, a recommendation, or an offer to buy or sell any securities. The views expressed are the author’s personal opinions and are subject to change without notice.

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