You're listening to TIP.
Hey everyone, welcome to the Investors Podcast.
I'm your host, Clay Fink.
I have a very exciting episode for you today because I'm going to be doing a bit of a
deep dive on two companies that have really caught my attention lately and deserved further
research.
Recently, I released an episode with Chris Mayer, who is the author of 100 Baguers.
This is one of my very favorite investing books because it touches on some of the things
that make so much sense in looking for great businesses that aren't always mentioned in
other places.
So, at the beginning of this episode, I'll be touching on many of my biggest takeaways
from Chris's book.
If you missed my conversation with Chris, I recommend you go check that out as well.
That was episode 543.
After I go through my biggest takeaways, then I'll be doing some analysis on topicus.com
and Copart.
Topicus is a spinoff of Constellation Software, which is one of my very favorite businesses.
This recently went public and is a smaller company, while Copart is already a top performer
over the past 10 plus years.
Both of these companies fall in line with my strategy of looking for high quality compounders.
Full disclosure, I do not own shares in either of these companies.
I do own shares in Constellation Software, which I do reference in my analysis of topicus.
Of course, nothing in this podcast should be used as financial advice.
Please consult a professional before making any financial decisions.
Everything in this podcast is solely my opinion and should be used for informational purposes
only.
I hope you enjoyed today's episode covering two wonderful businesses, topicus and Copart.
You are listening to THE Investors Podcast, where we study the financial markets and read
the books that influence self-made billionaires the most.
We keep you informed and prepared for the unexpected.
Alright, so like I said at the top, in today's episode I'm going to be covering two quality
compounders.
But first, let's talk about Chris Mayer's book.
Chris Mayer's book, 100 Bagger, really attracted me to these kinds of businesses that are high
quality compounders.
Before we dive into the two companies, I'd like to summarize some of the key lessons I
personally learned from reading this book and from interviewing Chris on the show.
The two primary lessons for a company to compound capital and reach 100 Bagger or multi-Bagger
status is first, the company needs to be deploying capital effectively so that earnings can grow
year after year.
If a stock is trading at a PE of say 20, and earnings grow by 15%, assuming that that
multiple of 20 stays the same, and that earnings increase by that 15%, your stock price should
also go out by 15% as well because your earnings multiple has stayed the same.
So the first thing you need is for a company to grow its earnings.
You want companies that are able to reinvest back into the business.
If a company is paying out a dividend or doing large share repurchases, then that may indicate
that the business does not have a lot of opportunities for reinvestment.
I'd much rather own a company that can reinvest back into it at 20 or 30%, than a company
that pays me dividends.
Chris mentioned the quote in our interview that dividends are an expensive luxury and
that quote really hit home for me.
It doesn't mean that dividends are bad or share repurchases are bad.
It's that if you want a compounder, it needs those high rates of reinvestment back into
the business.
Now the second criteria for a company to reach multi-bagger status is that it needs to grow
its earnings for a long period of time.
Or in other words, it needs to have a really long runway.
You can't buy Apple stock today assuming it's going to go from a $2 trillion to a $20
or $200 trillion company.
It just isn't feasible.
If you're wanting to buy a company that can grow for a really long time, you want to find
something that is in its earlier stages of its growth.
Chris shared some of his portfolio holdings on Twitter in his fund, which I'm very grateful
for.
Every company he owns has a market cap below $50 billion.
Almost half of his portfolio is below $10 billion market caps.
So he's looking for smaller companies, not companies that have a market cap in the hundreds
of billions of dollars or in the trillions of dollars.
Another thing I picked up from Chris that many people don't talk about is looking for
businesses with high insider ownership.
If the managers own a lot of stock, then their incentives are aligned with the shareholders
and they're much more likely to think long term and make decisions that are in the interest
of long term shareholders.
Chris also mentioned that he spends a lot of time analyzing a company's competitive
advantage.
If a business is able to grow over a really long time, other companies are going to try
to come in and eat their lunch.
If the business doesn't have a strong competitive advantage, then we probably shouldn't own
that company.
We should always be mindful of valuation as well.
If you're starting from a very high valuation, then you really need those earnings to grow
substantially in the future in order for the company to grow into that valuation.
So once you've determined the businesses that you like, you need to ensure that you're paying
a reasonable price for them in order to get a decent return going forward.
Chris also talks about this idea in his book of the twin engines, where you could benefit
from both the growth of the business, but also benefit from the company trading at a
higher multiple after you purchase it.
If you manage to get in early when a business is out of multiple, say, 15, and the business
does well and then the market better appreciates it, if it ends up eventually trading at a
multiple of 30, then that's 100% appreciation in the stock just from the multiple re-rating.
In my mind, it's really important to get the business right.
If you're willing to hold for a really long time and you're right about the business,
many times the valuation will really just take care of itself assuming you aren't paying
a ridiculous price, like 50 times sales or 100 or 200 times earnings.
Chris also references the work of Chuck Ockrey, who also falls in this line with this philosophy
of purchasing long-term compounders.
Ockrey has what is known as his three-legged stool approach, where he's primarily looking
for three things.
First, businesses that have historically compounded at a high rate of return,
second, businesses with highly skilled managers who have a long history of treating shareholders
like partners, and third, businesses that can reinvest cash flows at an above-average
rate of return.
So, very similar to Chris Mayer.
If a business has $100 invested in it and manages to earn 20% per year, the business will
grow to $120 at the end of year one.
When you compound that 20% over a number of years is when the magic really starts to happen.
At the end of four years, the business has doubled.
At the end of ten, you have a six-bagger, and after 25 years, you'll have a hundred-bagger.
Now, very few businesses, of course, are going to be able to achieve this, but there's still
that really powerful lesson of recognizing the power of long-term compounding.
Lastly, I also wanted to mention that Chris is also very strict on investing in companies
with a rock-solid balance sheet.
This ensures that the company won't have any issues during a recession.
They don't have a lot of leverage in order to generate high returns, and management is
conservative and holds a lot of cash.
Filters on these types of things just tend to point to a quality business that helps us
narrow down the giant universe of thousands of companies just to those very few really
good businesses that have relatively low risk of permanent loss of capital.
All right, so let's talk about the first company, which is topicus.com, which I'm going to refer
to here as topicus during this discussion.
If you tuned into my episode on Constellation Software, then you're probably familiar with
topicus as well.
That was episode 531 where I touched on Constellation Software.
Full disclosure, I do own shares in Constellation Software that were acquired in February of
2023 at just under $2,400 Canadian dollars.
This was a result of a spinoff from Constellation Software back in early 2020.
The company trades under the ticker toi.v.
Topicus is practically a carbon copy of Constellation Software, and they have a very similar business
bottle.
Topicus specializes in the European market specifically, and it looks to me that Constellation
owns roughly 30% of the shares of topicus.
So for those shareholders in Constellation, they're already getting exposure to topicus.
The company trades on the Canadian stock market, and at the time of this recording has a market
cap of around $5 billion US dollars.
Like Constellation Software, topicus is a serial acquirer of vertical market software
businesses which are very high quality businesses that tend to demonstrate characteristics such
as sticky revenues, strong customer relationships, and their services provided to customers
are really critical to the operations of their business.
These VMS businesses tend to offer their services in a very niche market, and these businesses
tend to sell for around $5 to $10 million US dollars to topicus.
So they're in these very small markets, which means that the competition in such markets
tends to be low, and these businesses are too small for a private equity firm to be
interested in purchasing them.
I find topicus to be a company that is worth diving into for a number of reasons.
First is that they are simply taking the approach that Constellation took in other markets,
and they're applying it to the European market.
Constellation has shown that this strategy of being a niche serial acquirer can be very
successful as long as you have the right managers and you're doing the right approach.
Because topicus is smaller and has a $5 billion market cap relative to Constellation's $41
billion, it's been said that buying topicus today could be similar to buying Constellation
back in 2010.
Of course, there are no certainties in this, and just because Constellation has been so
successful doesn't mean that topicus will replicate that success in the years to come.
But I find it exciting to have a company that may have the potential to do even half as
well as Constellation has to date.
The reason that Constellation software has been so successful is because they have a world-class
management team that is exceptional capital allocators.
They have a decentralized culture that allows for autonomy among the managers.
They have a reputation of being great perpetual owners of VMS businesses, and they have perfected
the formula of making VMS acquisitions that are value-ecreative to their shareholders.
Now let's turn to talk more about topicus specifically.
Topicus started around the same time as Constellation back in the late 90s and had pretty similar
beginnings.
A family out of the Netherlands had a nest egg of capital from selling their business,
and they wanted to use that capital to start acquiring VMS businesses.
For years, they operated under the name Total Specific Solutions.
Essentially, the pitch to businesses was, if you sell your company to us, we'll let you
continue to run your business.
In addition to that, they'll also provide you capital should you need it, as well as
administrative services such as HR, accounting, or legal support.
Then the businesses can focus more on what they do best, which is serving their customers.
From 2006 through 2012, TSS completed eight acquisitions, and from 2008 to 2012, revenues
increased from 67 million euros to 201 million euros, which is a 31% compounded annual growth
rate.
The businesses that TSS acquired provided highly customized services to their customers, which
led to very sticky revenues because it was such a headache for these businesses to switch.
In 2010, Robin Van Poldge, who became the CEO of TSS and he is the CEO of Topikis today.
In 2013, Constellation Software wanted to purchase TSS to which they came to an agreement
on as long as the founding family of TSS remained 33% minority interest, and Robin could remain
CEO.
At the end of 2013, Constellation officially acquired TSS, which is Topikis today.
Constellation was happy to have TSS under their ownership, as they had a dominant position
in certain Dutch verticals, highly customized products, a decentralized business model,
managers who'd seen long-term and very similar to Constellation's managers, and of course
they had a great reputation as a serial acquirer.
It took a couple of years for TSS to become 100% aligned with Constellation and get the
right people on the management team, but once they did, acquisitions for TSS just started
to take off.
Like I mentioned, from 2006 to 2012, Topikis completed eight acquisitions.
In 2015, they completed two.
2016, they completed 10, and then by 2020, they had completed 17 acquisitions.
So, from 2006 to 2012, they'd completed a total of eight, and in 2020 alone, they completed
17.
Looking at the geography a little bit here, in 2018, 80% of their revenues came from the
Netherlands, and by 2020, that had declined to 62% as they started to make more acquisitions
in other countries in Europe.
While under the ownership of Constellation, TSS increased revenues by 20% annually and
grew their EBITDA margins from 18% to 33%.
Then in 2020, Constellation announced that they would be spinning off TSS in conjunction
with a large acquisition of another Netherlands-based VMS business called Topikis.com.
Topikis.com, the business that merged to become what is the separate spin-off entity,
it took a slightly different approach than TSS and Constellation in that they were willing
to spend more money internally to achieve organic growth, and they encouraged innovation
in the development of new products.
But at the end of the day, their overall revenue growth and return on capital is similar
to that of TSS before the two merged together.
I suspect that the Topikis operating group will eventually become more acquainted with
being open to doing more acquisitions rather than putting focus on internal organic revenue
growth.
With this spin-off, Topikis would then have essentially three shareholder groups.
There was Constellation, which owned 30.35% of shares, the original founding family's
investment vehicle owned 39.3% of shares, and then public shareholders would own the other
30.35% of fully diluted shares.
I'm sure public shareholders sleep well at night knowing two-thirds of the shareholder
base thinks very, very long-term.
Mark Lannard and his team at Constellation have a long history of being great stewards
of shareholder capital.
The investment firm that owns the other portion is very similar in their mindset of
how they think about their ownership and topikis.
Topikis has the head office which oversees their three operating groups.
Each operating group has a number of business units under them that have full autonomy,
but it's the operating groups in the head office that end up making the capital allocation
decisions.
The majority of the free cash flows end up getting redeployed into acquisitions.
Since Topikis is a smaller company, they should have a much easier time at deploying all of
their free cash flow through acquisitions.
In 2022, they had revenues of 1.3 billion Canadian dollars.
For reference, 1 Canadian dollar is about 3-4 of a US dollar.
So 1.3 billion Canadian dollars in revenue translates to around 960 million US dollars.
Revenues for 2022 were up over 22% year over year.
Since I love Constellation so much, I really like that Topikis is essentially an extension
of Constellation.
Constellation owns 30% of the shares.
They used to be a part of Constellation so they know the formula really well.
And they've learned from some of Constellation's mistakes such as paying out special dividends
instead of using that capital to make larger acquisitions at slightly lower hurdle rates.
I see it as a benefit that Topikis is in the European market.
The European VMS market is more fragmented than say the US and there's less competition
with private equity firms for getting deals.
The reason the VMS market is more fragmented is because there are barriers between countries
that make it difficult to expand from one country to another.
There may be a language barrier, there are different regulations in different countries,
different payment systems and so on.
So the European market is more fragmented than the US which means that there's a lot
more opportunities for businesses to acquire that have a dominant share of their specific
niche.
Let's take a quick break and hear from today's sponsors.
At We Study Billionaires, we study financial experts and share their learnings and perspectives
so you can leverage their lessons in your own investing journey.
Recently, we partnered with Autocama.
Autocama is a rapidly growing cybersecurity technology company.
We partnered with them because we wanted to introduce their unique investment opportunity
to our loyal listeners.
Their equity crowdfunding round has taken off like wildfire, raising $5 million and growing
in just 5 days.
Don't miss your chance to join over 5,000 investors including myself to get behind this
rapidly growing tech company.
To learn about company growth, significant contract wins and the potential this investment
opportunity has to offer, head to invest.autocama.com.com.
That is invest.autocama.com.com.
Hey everybody, it's Trey.
This is a bit different to a typical ad because I wanted to recommend a podcast that I just
discovered.
If you love our show, then I know you'll want to tune into this one.
The podcast is called Nudge and it's hosted by Phil Agnew.
I don't think there's a better marketing podcast out there.
On Nudge, Phil walks through how successful entrepreneurs, politicians and influencers
have convinced and persuaded people.
On the show, Phil explains how Julius Caesar persuaded his army to adore him.
He covers the psychology-inspired tactics Steve Jobs used to grow apple and he shares
the strategies Mr. Beast used to capture the world's attention.
I think my favorite episode is the one on Mr. Beast.
It's not the standard marketing advice that you've heard hundreds of times before.
Instead, Phil shares the scientifically backed methods Mr. Beast used to become so popular.
It's great, the research that goes in Nudge is second to none.
So I recommend you give Nudge a listen after this.
Search for Nudge on Apple Podcasts, Spotify or wherever you get your podcasts.
You won't regret it.
This episode is brought to you by AlphaSense, the AI platform behind the world's biggest
decisions.
Are you still leaving Alpha on the table?
The right financial intelligence platform can make or break your quarter.
AlphaSense is the number one rated financial research solution by G2.
With AI search technology and a library of premium content, you can stay ahead of key
macroeconomic trends and accelerate your research efforts.
AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and
company analysis.
From when to buy, hold or sell investments to why, AlphaSense gives you the tools you
need to provide better analysis for you and your clients.
As a listener of We Study Billionaires, visit alpha-sense.com slash F.S. today to beat
FOMO and move faster than the market.
That is alpha-sense.com slash F.S.
To foster that future growth, I envision topicists acquiring companies in similar niches in other
countries and then sharing best practices between companies, more potentially even expanding
existing businesses into new markets.
The other positive with the European market is what seems to be much less interest from
private equity firms, as I mentioned.
Research from McKinsey indicates that most of the growth in private equity is in the
US, while Europe is still fairly stagnant.
Even when you look at Europe, it's more developed in the UK, which means that topicists probably
won't have too much competition from private equity in continental Europe.
This creates a ton of opportunity for topicists.
While a lot of money flows to the US, this means that there's a plethora of small businesses
in Europe because they haven't received that capital that would have been received had
they been in the US.
Another critical piece to consider with topicists is their organic revenue growth.
Historically, Constellations organic growth of their existing businesses has been under
2%, while topicists' organic growth has historically been over 10%, which is quite
impressive given that the majority of the cash flow is used for acquisitions rather than
reinvesting internally.
Topicists may have many opportunities to acquire small VMS businesses and offer them capital
to grow organically at really high rates because the company didn't have access to much capital
prior.
This is a win-win for both topicists and the acquired companies.
The structural advantages in the European market may mean that topicists may have a
chance at growing potentially even faster than Constellation did over the past decade.
When you look at the data within Constellation, you'll see that these structural advantages
also exist within Constellation when you're looking at Europe specifically.
The revenue growth rate within Constellation for the European market was just over 20%
annually from 2015 through 2020, while the revenue growth rate in Canada was only 17%,
the US 12%, and then other regions was over 30%, but it's a smaller portion of their business.
Remember that roughly half of Constellation's revenue comes from the US, so I see topicists
operating in Europe as a really good advantage to have from a shareholder's perspective and
in the business's perspective as well.
A lot of the competitive advantages that apply to Constellation also apply to topicists as
well.
The products within their businesses have that high switching costs, sticky revenues,
and there's little incentives for their customers to want to switch to a competitor.
Their decentralized business structure allows them to continue to grow at a rapid rate with
the right incentives put in place and then continue to scale the number of acquisitions
they do year after year after year.
And then they have the reputation and culture, as I've mentioned before, to continue to attract
those deals from businesses that are looking to sell.
And then similar to Constellation again, their high earners are paid cash bonuses that have
to be invested in shares and invested for a minimum of four years.
This is great for two reasons in my mind.
First is existing shareholders aren't diluted from the bonuses that are paid out, they're
paid out in cash, and then second is that managers are incentivized to act in the best
interest of shareholders.
And then since Constellation is a 30% owner in topicists, Mark Leonard and the brilliant
managers at Constellation are likely going to ensure that operations are run well within
topicists.
Shareholders of topicists have their wealth tied to Mark Leonard, who I personally see
as one of the best capital allocators I've ever come across.
As I mentioned in the episode on Constellation, the company thrives during recessions.
Their revenues from existing businesses are sticky and they don't decline too much if
at all during a recession.
And then second, during recessions, there's more potential to make really attractive acquisitions
as companies may become desperate to sell.
And then during recessions, there isn't really too much competition from firms looking to
make acquisitions.
Back during the great financial crisis, for example, Constellation's organic revenue declined
by 3% in 2009 and then 2% in 2010, and then it increased by 7% in 2011, which shows the
resilience of the business's Constellation owns as well as topicists.
Finally, turning to the valuation, I pulled some data from a website called QuickFS.
The market cap shows around $7.2 billion Canadian dollars, which equates to around $5.3 billion
USD.
QuickFS shows they produce cash flows of $282 million Canadian dollars for 2022, which means
that the price to free cash flow is roughly 25, which is lower than Constellations.
The price of topicists shares in Canadian dollars as of recording are around 88.
This is a slightly more attractive valuation than Constellation software.
During my episode on Constellation, the price to free cash flow was around 30.
Constellation is also much more well known and has a longer track record of being a public
company.
And given the specific advantages for topicists, I would say their valuation is definitely
more attractive, but there may be more risks and more unknowns with their long-term success
solely operating in Europe and maybe just things I'm not seeing in the business.
I believe a multiple of 25 is a fair valuation for a company that's this early in its growth
cycle.
Over the past 3 years, revenues have grown by 29% annually and then with the increase in
2022 being over 22%.
If free cash flows grow by 20% over the next 3 years, then paying a price to free cash flow
multiple of 25 today is equivalent to paying 14.4x the free cash flow for 2025, 3 years
from now and if that growth continues through 2027, then you're paying 10x2027 free cash
flows.
Of course, it's going to be really tough for them to continue to grow at this really
high rate.
None of this of course is a recommendation to buy or sell topicists, I'm just sharing
some of the information I'm seeing.
There are of course risks, there's the possibility that topicists simply can't do what Constellation
has done so well for many years and that the strategy isn't successfully implemented in
Europe or there's the possibility that Constellation maybe sells their shares of topicists and
then they lose that really valuable connection that they've built over the years.
Transitioning to the second compounder I wanted to talk about today, it is Copart.
CPRT is the ticker.
Copart is another business that is owned by Chris Mayer and his fund.
He mentioned a few times during my conversation with him, John Huber is another really great
investor I look up to a lot that owns Copart as well.
Before I get into my analysis, I wanted to share a clip here of my interview with John
Huber on our Millennial Investing Show back in May of 2022.
I was specifically asking John about the types of competitive advantages he looks for in
a business and he brought up Copart as a prime example of a company with a strong competitive
advantage in a number of different ways.
Here's the clip with John.
Barriers to entry is really important.
That's something I spend a lot of time thinking about.
Copart is a company that I really love and Copart actually is a business that exhibits
all three of those advantages, economies of scale, network effects and barriers to entry
and it's got a network effect because what Copart does most people don't know it's not
a household name.
What they do is essentially they operate junk yards.
That's the easiest way to think about it.
If you can visualize a junk yard, that's what Copart does and they run salvage auctions.
If you crash your car and you total your car, Guyco will take the car and send it to Copart
to sell on Guyco's behalf.
Copart works with insurance companies to sell these salvage vehicles to dismantling
and other dealers and in some cases the general public might want to buy these cars and oftentimes
these cars get shipped overseas to different buyers and they get repaired and they go
back on the road.
Copart is a great business because it owns the land and so there's economies of scale
because it can spread its growing revenue over a fixed cost of the land and that leads
to attractive unit economics that increase over time as the business grows and it also
has a network effect of buyers and sellers and insurance companies go there because it
has the most buyers and buyers go there because there's the most sellers.
Most importantly, I think with Copart is the barrier to entry and that's because no one
wants another junk yard in their backyard.
It's sort of a nimby, not my backyard concept there and it's very difficult for a competitor
to develop the relationships.
It's not just the fact that no one wants it in their backyard.
It's very difficult to get the zoning permits to set up even if you wanted to to set this
up.
So Copart has I think some natural advantages there and it's a business that enjoys relatively
low competition.
There's one other main competitor but it's not a business that gets a lot of attention
from VSTs.
There's not a lot of people that want to go into the junk yard business and so there's
just some natural advantages that I think a business like Copart enjoys.
And so those are three things that I spend a lot of time thinking about.
All right.
So as John Huber mentioned, Copart provides online auction services to sell and remarket
used wholesale and salvage title vehicles and they operate in a number of different countries
including the US, Canada, UK, Brazil, Ireland, Germany, Finland, among others.
On their side, they also offer a number of different services including salvage estimation,
end of life vehicle processing, vehicle inspections, dealer services, as well as membership services
that give you access to their network.
Now this is anything but a sexy business.
But when I look at the numbers and I look at the advantages this company has, it really
gets me excited.
So on their site, I see that they have a free tier, a basic tier that they offer members
which is 99 per year and then a premium tier for 249 per year.
Copart started back in 1982 with a single salvage yard and it's grown to become a global
leader in the online auction space for vehicles.
The company IPO'd back in 1994 and it's been a really strong performer as the stock
has risen from a split adjusted price of 30 cents in 1994 to $77 today.
The business has two main revenue streams which includes their service revenue and then
their purchase vehicles revenue.
Service revenue is essentially when someone lists a car on their site and then they collect
a fee on the sale for being the intermediary.
Pretty simple.
In this case, they're not taking ownership of the vehicle.
Purchased vehicles refers to vehicle sales where Copart has taken ownership of the vehicle
and then sells it at a higher price and then pocketing the difference.
Service revenue was up 24% in 2022 at $2.8 billion while purchase vehicles revenue was up 61%
at $648 million.
So service revenue accounts for over 80% of total revenue for fiscal year 2022.
When thinking about this business, the point that John Huber made on their network effects
really resonated with me.
You want to go to the largest network with the largest number of buyers so that you can
get the best price you can.
Pretty simple.
When I look at the financials for Copart, I see a ton of good things.
Over the past decade, revenues have grown by 14% annually and free cash flows have grown
by 17% annually so the company has operating leverage meaning that their earnings are outpacing
their revenues.
And this is because they're buying the land which has relatively fixed costs while the
revenue in their market share increases year after year.
Their debt to equity ratio is only 0.3 so they have a really strong balance sheet.
They've been profitable each of the last 20 years and their return on invested capital
tended to be in the mid teens.
But it really jumped back in 2017 and ever since it's been in the mid 20% range, really
strong return on capital.
As a testament to the quality of the management team, Chris May has shared this data on Twitter
that compared Copart to their primary competitor, insurance auto auctions which I'll refer
to here as IAA.
Copart invested 4 times more back into their business since 2016.
Despite during that time period, they paid down $700 million in debt and their competitor
issued $1.3 billion in debt.
And on top of all of this, Copart produced $1.4 billion in free cash flow over that period
since 2016 and their competitor produced no cash flow and they paid out these substantial
dividends to their shareholders of $1.8 billion.
So Copart very clearly is all about reinvesting back into the business.
And Copart actually doesn't pay a dividend because they have so many investment opportunities
that they're capitalizing on.
And I think this is a really important piece that I picked up from Chris Mayer.
He referenced that quote from Thomas Phelps in my interview with him that dividends are
an expensive luxury, meaning that it might be nice to see a company paying out a dividend.
But if the dividend could have been used to reinvest back into the business as say 20%,
then you're missing out on that substantial compounding over the years ahead.
Chris had this other quote from our conversation that Copart seems to get better with age since
they're continually reinvesting back into the business and the lead over their competitors
just gets larger and larger.
And at this point they've reinvested so much back into the business that their advantage
is insurmountable because it's costed them billions and billions of dollars.
And then you compare the market share between Copart and IAA.
Copart's market share has marched upward year after year and then IAA is losing market share.
Chris shared this data that was pulled from a presentation by Luxor Capital that I'll
be sure to link in the show notes for those interested.
Luxor Capital was an advisory firm that highly recommended that Richie Bros. not acquire
IAA because Copart was such a better business and you don't want to be competing with them
essentially when IAA's business is already deteriorating.
There's a headline from March 20th, 2023 that Richie Bros. acquired IAA for $7 billion
weeks after two proxy advisory firms urged shareholders to reject the deal.
They have this slide here in their long and in-depth presentation that is titled Copart
vs IAA is not a fair fight.
And it says, Copart has more buyers, more sellers, a stronger network effect, a stronger
balance sheet, far more e-beta to invest out of, an advantage cost structure from owning
their land in an experienced management team.
And then just looking at Copart here at the time of the presentation, it had a market cap
of $33 billion, almost $1.5 billion in e-beta, 9500 employees, 17,000 acres of land, $1.5
billion in net cash, $425 million in CapEx in the trailing 12 months, and their co-CEO
is the founder.
All of these statistics I just listed trumps their competitor.
Let's take a quick break and hear from today's sponsors.
This episode is brought to you by Seeking Alpha.
Research shows that individual investors collectively underperform the stock market because their
decisions are often driven by emotions.
Seeking Alpha's Alpha picks removes emotion by providing you with two data-driven stock
ideas each month.
This performance has been incredible.
Alpha picks is up 20.2% versus just 3.1% for the S&P 500 as of March 13.
You can subscribe to Alpha picks for only $99 for the first year.
As a listener of this podcast, you'll also get a special bonus.
30 days of Seeking Alpha Premium for free.
Seeking Alpha Premium is the leading community for engaged investors in the best source of
investment analysis and opinion out there.
Go to SeekingAlpha.com.com.
For a special deal, Alpha picks for $99 plus one month of free Seeking Alpha Premium.
That's SeekingAlpha.com.com.
Thank you to Seeking Alpha for sponsoring this episode.
From Wondery, flipping the bird Elon vs Twitter is a new podcast that unravels the fascinating
story of Elon Musk's unexpected bid to buy Twitter and all the drama that has happened
since then.
As one of the richest men on Earth and a self-described business maverick, Elon epitomizes
the Silicon Valley ethos of move fast and break things.
And once Elon became Twitter's new CEO, you were either with him or against him.
Those still employed at Twitter soon saw the company and its culture morphed into something
they didn't recognize.
He laid off 75% of the Twitter workforce, reinstated exceedingly problematic and dangerous
users, and even encouraged his staff to sleep in the office.
Ex-employees, Elon's critics, and fellow CEOs were quick to denounce him as an in-over-head
rich guy.
But Twitter's doors are still open today.
Is Elon all talk or are his unruly methods actually the work of a genius?
Follow Flipping the Bird wherever you get your podcasts.
For those of you who are Amazon Prime members, you can binge the entire series ad-free on
Amazon Music.
Download the Amazon Music app today.
If you enjoy this podcast, you're going to love our free investing newsletter We Study
Markets.
We've realized that not everyone has the time to listen to a podcast every day or even
every week.
So we took the same type of content and put it into an easy-to-read free newsletter.
In just five minutes a day, you can stay up to date with what's going on in the financial
world.
That means instead of mindlessly scrolling social media, you can quickly learn what's
going on with the markets and your money, and it's completely free.
Join over 30,000 other readers now at TheInvestorspodcast.com.
That's TheInvestorspodcast.com.com.
Another slide shows that Copart has three times the number of unique visitors globally.
A big issue with IAA, according to this presentation, is that they lease their land and have largely
neglected reinvestment, while Copart has heavily reinvested in CapEx since 2016.
So IAA has just fallen further and further behind on all fronts, and they need to invest
billions of dollars just to try to compete and regain that market share.
The situation IAA is in with them paying these big dividends to their parent company, puts
Copart in such an advantageous position where they just continue to get further and further
ahead with their competitive advantage.
There's one slide here that I feel is such a good business lesson here.
It's titled, RBA Management is in denial on why IAA will not be the exception to the
laws of nature.
It states, quote, the history of marketplace businesses contains numerous examples of number
two players burning enormous amounts of cash to catch up with no sustainable share gains
to show for it, end quote.
Then it shows brands such as Amazon versus Walmart, Uber versus Lyft, Spotify versus Pandora,
and then Airbnb versus Verbo.
And then of course we have Copart versus IAA with Copart having a market cap 5.6 times
the size of IAA.
The point they're making here is that the first mover gets a sizable head start over
all of their competitors and it becomes exponentially harder for the other players to catch up,
meaning that you just can't simply invest the same amount of money that the first mover
did, you're going to have to invest much more than the first mover just to even have
a shot because there are many different aspects that are difficult if not impossible to capture,
such as the customer mind share that the first mover got.
Once someone is so used to shopping on Amazon and it works really well for them, why would
they all of a sudden want to switch over to shop on Walmart online for all of their online
shopping?
The same concept applies to Copart with their online platform.
It's also really nice as shareholders to really only have one real competitor.
80% of the market they're in is split between Copart and IAA.
In the US, Copart has a 40% market share so there's still room for them to grow and continue
to capture share from their competitors as well as just the overall industry growing and
expanding itself so they're growing in terms of stealing market share and then they're
also growing from the overall industry growing as well.
The competitive landscape is not really a situation where there's dozens of players and you
don't really know who the clear winner is going to be.
I listened to another podcast that Chris Mayer was on and he was talking about his research
and how he had spoke with someone who worked at IAA.
He asked this person that worked there how difficult it is to compete with Copart and
the guy evidently told him that you would be crazy to compete with Copart.
You'd have to get all these physical yards all over the country in places that are tough
to get land and then from a physical perspective it's just not the type of business that people
really get attracted to.
Then there's the regulatory aspect in the zoning laws as well where only certain pieces of
land can become a lot for salvage cars so essentially in order to get the land you need
to be buying a lot of these lots from Copart themselves that were able to get these back
in the 1990s when the laws were different you know the zoning and regulatory aspect in
that landscape was totally different.
Copart's advantage seems to be especially shining in the past couple of years as their
revenue in 2021 increased by 22% and then 2022 increased by 30% just really amazing.
One piece I really like about Copart's business is that there's both the physical and the
online presence so they're benefiting from both.
The online piece enables the network effects where anyone can go online and purchase the
vehicle and then the physical piece is all the land they've purchased to support that
online network and make it incredibly expensive for a competitor to work its way into their
business and industry.
It took a ton of time and a ton of effort for them to build this out.
It's not like they're just a pure technology company that might be disrupted by a new technology
so I definitely think that sort of industry dynamic and that dynamic with Copart is definitely
worth considering.
Taking a look at insider ownership I found some data on this site called SEC Form 4.
Willis Johnson the founder owns almost 25 million shares which today's worth roughly
$1.9 billion so he has substantial alignment of interest with shareholders.
The CEO Jay Adair owns 5 million shares and the co-CEO Jeff Leow owns 325,000 shares.
The CEO Jay Adair is Willis Johnson the founder's son-in-law.
Jay started with Copart all the way back in 1989 at the age of 19 and he became the CEO
in 2010.
Willis Johnson is no longer with the company the founder but he still has significant ownership
in Copart so the insider ownership seems to look really really good.
Copart's managers really are best in class as they always think really long term and
they're always looking to allocate capital effectively.
Their return on invested capital has increased in recent years like I mentioned earlier and
year after year it's just been really strong and consistent.
Here's a line from their co-CEO Jeff Leow during their Q4 earnings call that I wanted
to read here.
The priority certainly is always to invest in and this is what any good steward of capital
would I think is the framework they would approach the question with which is how do
we maximize those returns over 30, 40, 50 year time horizons and if that is your framework
we would always elect to invest productively in the business long term.
There is power in the network.
There's power in physical capacity.
There's power as you heard me say in owning it and controlling it into perpetuity.
We generate cash of course, net of those investments as well.
As you know from our history we buy shares back.
We do so aggressively in real volume.
We also do so periodically as opposed to predictable routine buyback program but at some point
we will be buying back more shares.
As Jeff stated management is very opportunistic about performing share repurchases.
Buffett taught us that you only want to perform share buybacks when the intrinsic value of
the shares is more than the share price.
If buybacks are performed when the stock is overpriced then shareholder value is being
destroyed as a result.
Very few management teams truly act in shareholders best interest in this way.
Since Co-part has a really strong balance sheet they're also well prepared to serve
their largest customers such as insurance companies during these times when they need
Co-part most.
This could be during something like a natural disaster such as a hurricane.
Insurance companies want to partner with a business they can trust which management really
understands and really wants to take care of their customers.
Back in 2019 Co-part partnered with Geico to take on more of their business over time.
A big reason they did this was because after Hurricane Harvey, IAA wasn't able to meet
Geico's immense needs during that time.
Sometimes it literally takes a disaster for a business to make a change and insurance
definitely isn't an industry where players are moving really quickly.
They're really slow to change and while Co-part focuses on having these long-term relationships
with their customers, they continue to attract business from their competitors because they've
built that trust and that reputation relative to their competitors.
In fact, since I mentioned Geico, when IAA would report their results, they would exclude
one of their large customers when they would present these pieces of their results to their
shareholders and that company that they excluded was Geico.
Geico was transitioning away from IAA to Co-part and IAA rather than presenting the facts to
shareholders, they would try and cover up that information to say, hey, if you ignore
this one customer, then we're actually growing, which that alone is a tell of managers I personally
don't want to be partnering with.
I want managers that are being honest, they're being transparent and they're being straight
up with their results and taking ownership of their results rather than trying to hide
or manipulate them.
And then the other reason Co-part holds so much cash is because they want to be in a
position to opportunistically buy back their shares.
It's no wonder that management thinks and acts like owners and acts in the best interests
of long-term shareholders.
If you were to own hundreds of thousands of shares, you wouldn't want to be destroying
shareholder value by overpaying on buybacks or incurring unnecessary taxes by paying out
large dividends to their investors.
Co-part doesn't even pay a dividend and that's because Co-part's managers have skin in the
game while IAA's managers do not.
Transitioning to cover the risks, one risk with Co-part is the eventual transition to
autonomous driving, hypothetically if autonomous driving is really good and many people are
using it, then in theory there will be less accidents and less inventory for Co-part.
Autonomous driving is not here yet as we all know and we don't know when that will really
be widespread.
The kicker with Co-part is that since there is so much technology involved with cars nowadays,
this has actually been a tailwind for their business because a lot of times when you have
these minor accidents, it essentially totals the car because it's so expensive to fix.
So for now it seems that the rise of technology and vehicles is more of a tailwind rather than
a headwind for Co-part which is another interesting dynamic in my mind.
Another piece to consider here is that Co-part is continuing to expand internationally.
So while there may be autonomous vehicles rolling out in the US and Europe, there won't
be in a lot of other places they're expanding in.
Rather than the near term, say 5-10 years, autonomous driving shouldn't be a big risk
for Co-part in my opinion and management also has discussed electric vehicles and their
Q4 earnings call.
The EV market is still very small but as it grows it will actually benefit Co-part as
well because they're easier to total because of that more advanced technology that's in
them and then there's just an absence of repair networks for these vehicles.
Just given the sheer change that can happen in society over the long run, it's really
hard to tell what Co-part's business will look like way down the line.
So turning to valuation here, Co-part is definitely not a cheap company when looking at the multiples.
I'm looking at the EV to EBIT for example.
It's currently around 26.
Over the past five years this multiple has trended from 17 to around 35 in late 2020.
So today's EV to EBIT is roughly in the middle of where it's been historically over the past
five years.
And then the PE tells a similar story which sits around 31 today.
For fiscal years 2022, again they grew revenues by 30% year over year which is partly due to
the tail end of rising used car prices during the year.
Co-part shouldn't be too dependent on high used car prices I don't think.
On the one hand their average selling price on their services revenues increases as the
price of cars increased.
But on the other hand as the price of cars increased more people would be willing to
repair their cars rather than sell to co-part.
So it's kind of a give and take either way.
It's clear that co-part has seen really strong growth internationally and it's been continuing
to steal market share from other competitors such as IAA.
Co-part's units in Q4 were up 5% year over year while IAA's units were down 3%.
And they operate in a really large and a really growing market as the US has roughly
285 million cars in operation which is growing at around 2 million cars per year after you
consider what's added and then what ends up getting totaled.
So co-part's market cap is around $37 billion.
They have a rock solid balance sheet with $1.4 billion in cash and then running a bit
of math on the valuation here just based on their net income numbers which I will take
at face value as their owners earnings before making any of their internal investments.
Net income has grown by 21% annualized over the past 5 years which is really high because
we've seen a big boost in their business since COVID.
With a market cap of $37 billion and a net income for the trailing 12 months of $1.1
billion that puts their multiple at $34.
When I project that out over the next 5 years for example and then I assume a multiple of
$25 at the end of 5 years.
Right now the market is currently pricing in earnings growth of around 13-14% over that
5 year period so essentially if co-part grows their earnings at around 13% over the next
5 years and you see some multiple compression down to a multiple of 25 then I would expect
this stock to return around 10%.
If you're a long term buying a hold investor then today's price is probably a fair price
it's not super overheated and is definitely not a screaming bargain.
If you're more opportunistic about your purchases and being selective when you buy my co-host
stick Broderson is then you probably want to put co-part on your watch list and keep
an eye on it to see if it has another drawdown like it did in late 2022.
It seems that the more I've read about co-part the more I really like their business.
I don't believe I'm one to say whether it's far overvalued or undervalued at today's price
but I do believe that over the long run this business will continue to do really well.
One of the things I almost always look for in a company as well is to see how it did
during the great financial crisis to see how resilient it is to weather through big economic
storms.
Co-part's revenue was up 40% in 2008 just before the crisis and then it was down 5%
in 2009 so definitely didn't do too bad considering it had such a boost in 2008.
Then during the crisis they still remained profitable so there was really no real detrimental
threat to the underlying business.
Remember that co-part is ultimately tied to the automobile market?
It might not be a surprise to you but during a recession people still drive their cars and
they do what they need to do and inevitably accidents still happen.
I saw one right up on the company mention that this is very much like a Peter Lynch
type stock.
Since they're in the junkyard industry it's just not a sexy business.
It's not like Tesla with its cool cars and outspoken CEO and fun things always happening.
It's really the complete opposite.
So simply because of that it probably won't get a lot of attention from everyday retail
investors.
If you'd like to learn more about co-part Chris Mayer recommended reading the book junk
to gold.
I haven't gotten the chance to read this but if he recommends it I'm sure it's a really
great story talking about the rise of co-part.
As always nothing stated on this podcast is intended to be investment advice please consult
a professional before making financial decisions.
If you're like me and enjoy learning about individual stocks and maybe what types of
companies other people are researching then you may consider joining our TIP mastermind
community.
Here soon I'm going to be chatting with Stig Broderson and do a Q&A session with him.
Stig is meeting with the management team of a small company that's only around $300 million
in size so I'm really interested to hear Stig's thoughts around why he's so interested
in learning more about such a small company.
I have another call booked with Lance who is a member of our community and he has aspirations
of starting his own fund.
And I have another call booked at the end of May to chat with a gentleman who specializes
in researching potential multivaggers which I absolutely love chatting about.
I really enjoy being a part of this community because I think it's just a great way to source
ideas from others as well as stress test your own ideas.
I'm well aware that I have blind spots so I'm always interested to hear the opinions of
others who are like minded value investors.
Community members also get access to a community forum to collaborate and share ideas as well
as our paid tier of our TIP finance tool.
Anyways if you'd like access to these exclusive conversations then you can check out the community
by visiting theinvestorspodcast.com.com.
That is theinvestorspodcast.com.com.com.
That wraps up today's episode.
If you're on Twitter and enjoyed this episode I'd really appreciate it if you shared it
and tagged me at Clay underscore Fink, C-L-A-Y underscore F-I-N-C-K.
That would be very much appreciated.
Thanks again for tuning in and I hope to see you again next week.
Thank you for listening to TIP.
Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn
how to achieve financial independence.
To access our show notes, transcripts or courses go to theinvestorspodcast.com.
This show is for entertainment purposes only before making any decision consult a professional.
This show is copyrighted by the Investors Podcast Network.
Written permission must be granted before syndication or rebroadcasting.
I'm not sure.