Compart may NOT be a bargain

First, let me say, I’m a nobody in the stock trading world. I have however been in the automotive industry my whole life. I keep seeing people suggesting Copart as a good buy due to its low share price of late. Well, I’d like to share an observation that I’m not sure people are aware of. Copart is primarily a salvage auction. They charge high fees for insurance companies to sell their salvage vehicles, as well as other corporate sellers, such as charity donations, some fleet vehicles, and on occasion some dealers. But the vast majority of their sales are cars that are fully written off due to serve damage. I’m going to lay out a few reasons Copart is facing some strong headwinds going forward and why the share price may not be the bargain people think it is. In 2013-2022 there was a good business to be made from buying wrecked cars and rebuilding them. Used car prices were high, inventory of good used cars was low and thus there was a significant margin to be made by buying wrecks to rebuild. You could buy a wreck for 25% of it’s retail value, put 40 hours and some capital into repairing it and still have a good car for 50% of the value of a similar used vehicle. That’s not true anymore. The margins are gone and the tech going forward will continue to make this more and more difficult. That’s another major issue. The tech in cars hadn’t quite reached the levels we see today. Parts interchangeability was a lot easier. Today, many salvage parts are more difficult to interchange due to the need for dealer authorized software reprogramming. This not only makes wrecks increasingly more difficult on late model cars, but shrinks the salvage industries market share for good used parts to be sold to independent repair shops. Overall, as these tech laden late model cars age, they’re seeing higher depreciation than ever and lower margins for salvage companies to break them apart for their components. There’s still money to be made breaking cars apart, but there’s not nearly as much profit in a wrecked vehicle that there was in the past. Repair costs also continue to climb as parts, supplies and especially skilled labor increases. The number of people able to do this kind of work is decreasing rapidly. People also don’t seem as interested in taking the risks to buy wrecks to rebuild themselves. Especially as used car prices fall. It’s becoming much more attractive to buy in-wrecked cars with minor mechanical issues and deferred maintenance than to undergo a complete rebuild of a totaled vehicle. With used car depreciation and a surplus of used inventory sitting on lots, cars are starting to sell wholesale for prices that make them much more attractive. If you look at the bid no sale prices mounting up at auction houses like IAA, and Adessa, you begin to see the reckoning Copart is up against. Why buy a wrecked car that will come with a branded title and a lower resale value along with an increased risk of needing repair (much of which you won’t know till you dig into the project) when you can buy a clean, in-wrecked car from a dealer trade in at a lower delta than ever. The truth is, there are more good reliable, well cared for cars at auction right now than there are people with the means to buy them. Lastly many cars that used to go through Copart auctions were bought by foreign buyers. Since the start of the trade war, tariffs have greatly affected the profitability of many exporters trying to buy cars from the US. Trade relations have a big effect on Copart sales and the values of salvage cars. There’s great risk to Copart from the standpoint of globalization failing and the US pulling back on global trade relations. Just be mindful of these issues if you are looking at Copart as a cheap company. There’s good reason that their market cap is declining.