Andrew Wagner on $CPRT (Podcast #103)

Andrew Wagner, CIO of Wagner Road Capital Management, discusses his thesis on Copart (CPRT). You can find my notes on CPRT here and Andrew’s book, The Economics of Online Gaming, here.

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Transcript begins below

Andrew Walker: Hello and welcome to Yet Another Value podcast. I'm your host, Andrew Walker and with me today, I'm happy to have Andrew Wagner. Andrew is the CIO of Wagner Road Capital Management. He's also the author of a book that's shot up to the top of my reading list now that he sold me released it, Economics of Online Gaming. I'm gonna find it and put a link to that in the show notes. Andrew, how's it going?

Andrew Wagner: It's going great. I am really excited for the Berkshire Hathaway annual meeting coming up in just a couple of weeks.

Walker: I've got some personal stuff so unfortunately, I can't go. I know I need to go before Charlie Warren pass away, but if I can tempt you, I'll be at the Markel investor day a couple of weeks after that, if you're looking for a backup day.

Wagner: I don't know, maybe.

Walker: You're in Minnesota, am I remembering that correctly or am I crazy?

Wagner: Yeah, I'm in St. Paul. It's only I think a five-hour drive. It's pretty easy for me to get there, maybe easier than you.

Walker: I'm taking a quick flight but no, I was just making sure. But yeah, if anyone's there, slide into my DMs, I'll see you there. But I'm way off the rails here. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone. Nothing on this podcast is investing advice. Everyone should please do their own due diligence consultant, financial advisor, not investing advice. Second, I'll give another quick disclaimer. My wife just had her wisdom teeth out. So she's a little loopy in the bedroom. If anybody sees a beautiful woman on YouTube come and go crazy, it's the wisdom teeth surgery talking. But third, a pitch for you, my guest. Look, I really enjoyed your blog. I thought it was one of those underfollowed gems. There's a post every couple months or something, but it turns out it's not because when I went on Twitter, I was like, I'm having Andrew on. I got like 20 DMs, everybody's so excited. I was like, "What? I thought I was the only guy who had heard of this," but really excited to have you on. I think this is gonna be an awesome podcast.

So there all the way, let's just turn to the company we're going to talk about. The company is Copart. The ticker[?] is CPRT, and I'll turn it over to you. What is Copart, and what's so interesting about them?

Wagner: So I think I should probably start with the story of how I discovered this company in the first place.

Walker: It's a pretty good one actually, a very valued investor with the minivan and everything but yeah.

Wagner: Yeah, there's a book called The Sleuth Investor, that might give you a little bit of an idea of what happened here. Car guys love this story because it's so ridiculous. This was about 2014. I totaled my minivan, which was a '97 Plymouth Grand Voyager, it's a car nobody cares about. There's tons of them out there. I knew somebody who was kind of connected to the salvage business and he said, "Okay, you there's three ways you can get rid of it. You can sell it on Copart or IAA or LKQ." And then there was also a used car dealer who thought they might buy it and fix it up and sell it in their used car dealership, which I thought was a little shady. But they were interested too. I decided that I wasn't going to do any of those things. Instead, I kept it for the parts, and I bought another one that I was going to use those parts to fix up. And I very quickly realized that that was a terrible idea. The numbers just didn't make sense, but I actually learned a lot about the salvage business and the used car business, from talking to the tow truck drivers that I had to constantly use because the cars never worked. And the people who were going into salvage yards and picking parts out of the salvage yard to help me get my car fixed. And the mechanic who just absolutely loved my business, who knows, maybe I put his kid through college, I'm not sure.

Walker: If you put his kid through college, I think we'd be talking about a little bit different economics there. Maybe you put him through a weekend retreat or something.

Wagner: Yeah, maybe something like that. But I will say what I learned from doing this actually has more than made up from all the silliness of what I was trying to do. I won't do it again, though, I would not recommend that. So about three years later, I was going through a financial screen. I generally just look for kind of strong financial returns, strong balance sheet, that kind of thing. Copart was one of the companies that came up, and I realized, "Oh, this is not just a local salvage yard." This is international business and they have a lot of really good things going on. And if you dig into the history a little bit, it's actually a family business that's been around, I think for two years. I think it was founded in 1982 and it's a second-generation family business now. What they do is very simple. When somebody totals their car, the insurance company takes it from them, then they put this car up on Copart's auction, then, Copart just gets a cut from the sales, and that's it. That's basically their business.

Walker: That's a great overview. Lots of places I want to go into, including why is business so advantaged and everything. But I guess the first thing, I'm going to try and make this the first or second question, I asked everyone going forward. The market is a competitive place. There's a lot of things. Copart isn't exactly an underfollowed company. So you've got an investment in it, right? Obviously, you have an investment, because you think that investment on a risk-adjusted basis is going to generate alpha. It's something generates off of because the market is missing something that you're seeing, what is it that you see in this company that you think the market is missing?

Wagner: I think it's a time horizon thing with this particular company. I think that it's one of those things that has never really looked like a cheap stock, at least as far as I know, it's always been kind of, whoa, maybe that's a little bit too expensive. I'll wait until it gets cheaper. And then you look at it a few years later, and it's still kind of a little bit expensive. What they have is a really long-term runway. So I wouldn't necessarily say that I see something hugely different than what other people do. It's that I'm thinking about it from a much longer-term perspective, and the opportunities that they have maybe over the next 10 years, instead of like, what's going to happen to them over the next quarter.

Walker: It's one of those things. So I used to work at McKinsey. My old boss at McKinsey published a book called Valuation and Value. And one of the things he had in there was companies with consistently high returns on capital, consistently outperform the market over a long time. For a long time, I think people have tried to think through something like why did these companies consistently outperform, why aren't they priced higher. And I kind of think what the thing is, the market kind of assumes after five years that that competitive edge is going to shrink. And you can make an excess return kind of by looking out two years five through 10. I know people call it time horizon arbitrage, but what it really is, is saying this, return is consistent, and I'm actually going to keep our need overflow in the excess timeframe. And by doing that, you capture that spread year after year after year, now you are exposed to like some tail risk where like a Kodak earned excess returns for 30 years, and then all of a sudden photography went away and then went to zero. But the nice thing with Copart is, we'll probably talk about that later, but used cars and everything probably isn't going to go away. So you probably can't keep earning that return. Does that make sense, or do you have anything else to add there?

Wagner: Yeah, that makes total sense. This market, in my opinion, is not just going to disappear. The thing I would add to it from a qualitative perspective is that it's a family business. The CEO is a major shareholder and has been with the company for a very long time. And when you have that really deep knowledge of the industry, you can do things a little bit better, even if it's a more competitive industry. I think they'll do a little bit better just from having management that's been around forever. Management that's heavily invested in the company, those kinds of things, too.

Walker: I read and flip through a lot of proxies, I don't think I've ever read a proxy quite like Copart's proxy. Yeah, I was joking online. It's kind of compounder bro[?] porn, that it's like we basically don't pay our CEO, we only give him stock options. He gets rich when our stock goes up. There's a line like nearly three decades of strong share performance by Copart and 30 years as a senior exec executive have enabled our CEO to build a substantial personal wealth which is a little bit understated because it's worth like a billion dollars now, right? Like, it's incredible. People should go read it, how they compensate and everything. It is absolutely incredible.

So let's dive into the business. You said Copart, what they do, somebody wrecks their car, generally, an insurance company will toss the car over to Copart, who's going to sell it either... I believe they sell it on the market and people will take it apart for parts and stuff is generally what the car is going to get used for. Is that right? So why is that an advantage business? It sounds pretty simple like, "Hey, I'm just gonna run an auction for a car. Like, all I have to do is take the cars from the insurance company," why couldn't the insurance company run it themselves or all this type of stuff?

Wagner: I think that's a really good question. I think the biggest response to that is where are they going to put these cars? I think that's the biggest problem. When the insurance company takes a total car, where are they going to put it? Where are they going to store it, they're still probably going to have to pay someone else to do that. So Copart is kind of taking that, which is actually the business they started in really was being the storage and then selling at a local auction. So I would say that's probably why an insurance company wouldn't want to do it themselves. They also don't necessarily want to be in that business. It takes a completely different skill set, to service, a car to sell a car, all those other things from the insurance company's perspective. I think this might be true for all insurance, they just want to be done with it. They don't want to hold on to that asset for any longer than they have to.

Walker: I don't disagree with anything you say there. But I do want to push back a little bit because Copart's are really nice returns on capital, right? Like one of the lines in the proxy is 30 years of strong share price performance, like 30 years of strong share price performance tends to attract some competitors. But here you have a market where it's pretty much Copart and IAA basically control this market. They're the two big boys. I think they have 85-90% share like nobody competes with these guys. So obviously, there are some benefits to scale some benefits, what is really driving Copart and IAA's benefits the scale where they can have this whole globally?

Wagner: So I would say that it's kind of driven by the network effects of the number of buyers that they can get globally. I think, I guess to go back a little bit, kind of answering your previous question is, when you look at the European model, it runs a little bit differently than the American model does right now. Where the European insurance companies, they'll pay the difference in the vehicle, then it's the policyholders' responsibility to get rid of the car instead of the insurance company. So even in that case, where Copart isn't really there yet, the insurance company still doesn't want to keep it.

Walker: I want to come back to that comment on international. But I think you can also see the first thing you said what there was, you're not going to have that huge marketplace of buyers right there. There are hundreds of potential buyers for a scrap car, right? Basically, everyone who needs parts is probably going to bid on it, probably would consider bidding on a scrap car at the right price. You need to go connect to all of these different buyers. So in many ways, this is as you said, it's a traditional marketplace business. And you can kind of see that in the proxy. Their peers include companies like match group, Tinder, guess what, you need to have lots of "buyers" on Tinder, right? You need to have lots of single men and single females trying to connect with each other. And once you get that liquidity, it's very hard [inaudible]. There's other, GrubHub, you've got to go acquire thousands of restaurants from me to download your app and get home food delivery, right? So you can see that in their peers that they've built this marketplace.

International, I want to turn to that because they've been attacking international. One thing, look, I spent 24 hours on the company, I read your write up. It seems like international should be attractive long term, but I don't think the margins have quite got there yet. And my first question will probably come back to international. But is this one of those things where like, obviously, this is a local business, right? If a car wreck in New York, you're not going to ship it out to California to get scratched, right? Maybe the buyer will be in California, but you'd probably sell it from a New York yard. Do they have network advantages where every yard they open both domestically and internationally, they kind of grab, it's more valuable to them than anyone else just because they bring that network of buyers there in the same way? I'm trying to think of another network of that company that would have we opened a new... a Walmart. A Walmart serves from a distribution center and every store that they place in that distribution center gives them a little bit of operating leverage, not quite the same, but off the top of my head. I think that's a good analogy. What would you think about that?

Wagner: So I would say that it kind of operates just like any other network effect would, every node that you add, increases the value of all of the other ones either network already. And that's true for any network effect type of business, and especially any two-sided market like this one where you have to have sellers or you won't have any buyers.

Walker: So it is working like that. That's perfect. Let's talk real quickly. I just want to... I know you said one of the things that you think about with the company is you've got a longer-term time horizon in the market and you think you'll keep into keep enjoying that consistent. Hey, we've got a moat. We're growing a little bit we're earning great returns on a capital thing, but I want to push back on that for one second because the bear case here is on Guess there's, I think there would be three pieces to it. The first would be valuation. This is about 30 times trailing price-earnings, which that's pretty expensive. So I want to talk about tuition. Why is 30 times earnings, why can we still earn a risk-adjusted positive return with that type of valuation?

Wagner: Well, I don't want to get into telling people they should buy something or not buy something, obviously.

Walker: We set it at the front, not investing advice.

Wagner: That's a good question. It's an interesting question, because when you think about businesses that have better returns, if you just hold them long enough, the risk of overpaying goes down over time, essentially.

Walker: Look, this is the classic thing, everybody made fun of the Nifty 50 in the 70s, but I believe it's been proven if you had bought the Nifty 50 yet, those absolute Neuspeed valuations at the start of the 70s and held it through... I think they were steady stocks in like 2000, or something, you actually would have beat the market despite playing those Neuspeed valuations. Now, it would have been better if you waited five years later. And instead of paying, I think they were selling for 100 times fee if you paid 15 times fee five years later. But it is true, in the long run, the high returns on capital are really what are going to influence your investment. But let me dive into valuation a little bit more. The second bear pushback, I think would be, "Hey, this isn't just 30 times earnings, but earnings have exploded higher, thanks to COVID, thanks to how crazy the used car market is and everything. "

So I want to ask you two questions. How has COVID impacted this company? And for this company, it's been in a positive way, I think. So that would be number one, and two, why do you think some of these COVID-driven dynamics are maybe a little bit more sustainable?

Wagner: Yeah, so it's really interesting what's happened in the used car market. And I guess for people who aren't aware of it, I would assume everyone's aware of it. But basically, what happened was there's a microchip shortage right now because car manufacturers kind of stopped producing during COVID. And now that they're trying to produce again, that that microchip, production shifted to other things, so they can't get all the supplies, they need to build new cars. So when people can't buy new cars, because they're not there, they're buying used cars. And that made the price of used cars basically skyrocket. And that helped Copart because the average selling price of a car went up dramatically. What's interesting about the salvage market, is that it hedges itself against the value of used cars. Because as the value of a used car goes up, it makes it more likely from a financial perspective, it makes more sense to repair the car. So when the value starts to go back down, it becomes more likely for a car to be considered a total loss, because it doesn't make sense to repair it. And the argument that the management makes, that I kind of agree with is that as prices go down, the volume goes back up, and the volume should go back up enough to make up for that difference.

Walker: Perfect. Then, I guess my last bit of pushback, I think all that makes sense. But I think my last and probably the one that would get me the most is like I think I agree with you, good company, great company, nice moat. It's probably going to grow over time, but I do think that the management team, this is one of those things. And I asked this question all the time on the podcast. If you've got a really astute management team who's super motivated, they own lots of shares, they're good at capital allocation, and they're not buying shares back. My question is, why should I be buying shares? Because they're showing that they don't think the best use of their capital is repurchasing shares, increasing their ownership, decreasing the share count. So if they don't think that's the best use of their capital, why is buying the stock the best use of my capital because I think... I don't have the numbers directly in front of me, but Copart hammered their share count in 2011.

I think in 2015, they did massive tender offers and obviously, the returns from those tender offers have been great, but recently, I think over the past four years, they haven't really bought back shares or no share repurchases of note. So I look at that and say, oh, this is a company that certainly doesn't think their stock is cheap. The CEO, again, he owns over a billion dollars, he doesn't think he's going to increase his net worth that much more by buying back shares. So why should I be buying back shares?

Wagner: I think that's a really interesting question. That's a really good question because we have the option of investing in the stock or not investing in the stock, but they have the option of buying back the stock or buying more salvage yards or investing in the business in other ways. They make the determination that maybe the stock is... so I could back up a little bit. So they'll buy back, if it's extremely cheap because otherwise, it makes more sense to reinvest in growing the business, instead of shrinking the market cap, essentially, is the way I would look at it.

Walker: Yep, I think a way to put it might be, and you can tell me if I'm wrong. The company earns, I'm gonna make a number because I don't have a model with returns on capital stuff. But the company earns 20%, returns on capital by investing in either international expansion more yards in the US all that type of stuff. And their stock, let's make a number up the stock. They think if they bought it back, they deliver 10% annualized returns by buying back the stock. So for them, it's a pretty easy choice, right? All of our capital should go to opening new yards, creative acquisitions, all that sort of stuff because we'll get 20% versus 10%. Whereas for us, as an investor, we might look at this and say 10% compounded, it's going to be very tax-efficient, I can hold this for years for the reasons that we talked about 10% is going to beat the market over the long term. So for us, because we can't go actually recreate the Copart business, it might be better to buy the stock, even though they're not buying back. Does that make sense, or do you think I'm kind of stretching there?

Wagner: I think that makes total sense. I hate to bring Berkshire Hathaway into this but Warren Buffett kind of talks about that all the time. And people complain and complain about Berkshire Hathaway not buying back stock, but when it makes sense to do so, they'll do that.

Walker: Yeah, well, Buffett also, and Cooper might have this because they've been out for a long time. Buffett also had that, hey, I've gotten more information about the business than anyone else, and I view you as my partner by buying it back. I almost feel like I'm the card shark at the table, though. Berkshire got pretty, pretty aggressive buying back shares over the past 24 months or so especially, maybe the last 12. So I don't know how much I quite believe that at this point, but it does make sense.

Wagner: What I would add is, I read that, when they did these big share buybacks, the management themselves didn't sell any shares. So they still made that decision not to, not to do that.

Walker: It's one of my favorite things when I read through a tender doc, and they have not all of them, but I think most of them, all of them have to have this section, but not all of them will fill it out completely. But they'll have the directors and officers, what are they doing in the tenders and I love it when I read a tender and it says hey, directors and officers own 10% of this company, we're buying that 20%, and none of the directors and officers are tendering in this thing. I just love to see that setup. Let me turn to peer. So we talked about how this is kind of an oligopoly. Then IAA is the competitor who owns another 40%. LKQ, I think actually is kind of a different business but there are some similarities, but it's really Copart and IAA. IAA was spun off from the car in about 2019.

So, unfortunately, I can't pull that 15-year comparison of the two or whatever, but you can pull a 15-year comparison of car versus Copart. And Copart has smashed car, and a lot of the questions I was getting when we announced this podcast was, why is IAA so bad and Copart so good? And I think off the top of my head, I think Copart's EBITDA margins are about 45% and IAA's are about 30%. And we can talk about some of the accounting quirks and ownership quirks that make that different but obviously, that's a big difference. So I want you to review this is an old gobbly, it should be an advantage business. Why is Copart so much better than IAA, or is that mistaken? Is IAA just as good as Copart?

Wagner: I would argue that almost the entire difference is because the management is so much better. Though that would be my argument. And if you look into the history of these two companies, they've been main competitors for something like 30 years 30, maybe 40 years. And in the early history, maybe not early but the 90s or so. IAA made the decision to grow as fast as they possibly could, leasing yards, just let's build capacity as fast as we can. Copart took a more deliberate approach, where they would buy the land, build a foundation, build relationships first, and then the money would come later. And essentially, what happened? Is it a kind of crash and burn from trying to grow too fast?

Walker: Do you? You said it's because the management is so much better, and that is great. We've talked about how when you're trying to build these companies and buy-in for the long term, like great management, and the CEO here, he's a billionaire from his ownership, as we talked about. He's only 52 so he could be doing this easily for another 20 years. The founder, who's executive chairman currently, and also I believe the father in law of the CEO, which I am kind of interested in, did he join because he was getting married, or was he so into the business? I'm interested in that dynamic, always, but we don't have to have it. But the exec chairman, he's 74.

So 52, 74, I mean, you've got a long runway ahead of these guys running the business, but you always worry like, the difference between Copart and IAA is management. You do worry, like, management can lose it. I knew somebody who oversight like, I don't know where I'm driving, but Microsoft, right? For 20 years, Bill Gates was the differentiator at Microsoft. But a business that relies on the major team will eventually be run by a ham sandwich or a monkey or something. Then Steve Ballmer took over Microsoft and Microsoft had their last 15 years, despite all their advantages. How much do you worry about so much of the advantage being built on Copart's management team versus, I thought this was a great business, but IAA is showing you maybe this business is only great because of who's managing it?

Wagner: Well, part of what goes along with having a management team that's been around that long is that they build up the culture of the company, to the point where everyone in the company should have a similar perspective, in terms of growth, and management that the management does, especially when the company founder is still involved. The other thing is that I think Copart has a pretty big advantage by owning the yards instead of leasing them like IAA does. Copart also has a very big head start in terms of international expansion.

Walker: But that brings me nicely into the next two things I want to talk about. So Copart owns the yards instead of leasing them. They mentioned this on their call, and it's one of the things that jumped out to me. They, most companies would go and they would lease the land to as you said, I did it to grow picker, and Coburn says, Hey, we go and buy land, because by doing that, we're not beholden, right? If we have a 10-year lease, and we've got a really profitable lot, guess what, at the end of 10 years, the landlord comes to us and says, hey, you got to pay the piper. And if you've got a really unsuccessful lot, after three years, the landlord says, I've got you for another seven, whereas if you buy it, you can hold that as a profit lot for years and years and years. And if it's unsuccessful, yeah, you'll have to sell it or probably take a loss. But you're gonna take a lot less of a loss than a seven-year lease. So it's more expensive, and it probably brings down your returns on equity. But it's probably a safer and better way to compound capital long term.

So I had my two questions here day by the lights. Where should we think of these lots being? Like I live in New York City, I don't think there's a used car scrap in New York City. They're probably not gonna be at the center of the towns, but are these lots valuable? Are they in good spots? Do they have lots of access to I guess interstate so that you could bring apart, or these thoughts kind of, hey, yeah, they're nice, because they've got everything connected, but they're so far out of the city that you could build another lot two miles down the road if you wanted to?

Wagner: I think that's a great question. That's something that I've heard, I think I've heard management talk about a little bit, is, you're not going to find one in the center of the city. But you'll find one pretty nearby. And I think there actually might be two of the like, within driving distance of where I am within like 20 minutes of where I live in the city. So they're not super far away, but they're certainly not in the city center. And what's kind of great about that, is when you have a city or even maybe a midsize town or something, there's some zoning that you have to do. If you put one scrapyard there, they might not let you put another one nearby.

Walker: So you get a little bit of almost regulatory moat where it's the same with the landfill, right? You get a regulatory moat because once you've got one, you probably don't need a second landfill, the city probably doesn't want to second landfill. They're similar to a cable company where the economics, you can have one and they can be super profitable, but it probably doesn't justify the economics don't justify a second one, the regulations will justify the second one so you get that. I don't know the answer to this, [inaudible] but it could help with thinking through the real estate. Have they ever had a lot? They've run it for 20 years, and then the town's grown around them, and they say, oh, you know what, this lot, the town's grown so much around us, it actually be better if we like, kind of sold it and redeveloped it as condos or a mall or something.

Wagner: As far as I know, I don't think they have done that. They seem like the type of management that wouldn't take that approach, they would stick to the business that they know. And they would continue operating the way that they think is best for their particular business instead of converting into something that they're not familiar with.

Walker: I doubt these guys are going to run a condo. I was more wondering if they had... it does happen where the city develops so much around you, and it's like, oh, a scrapyard is not the best use. So they sold the land for a huge profit to a condo developer or something.

Wagner: I haven't heard of that happening.

Walker: Okay. So, I mentioned that this company trades at 30 times price-earnings earlier, about a 30 billion market cap. But you know, the thing with the price to earnings is because they own the land, their earnings are going to be a little bit distorted versus somebody who leases the land, right? You don't really have to take rent expense on that. On that land ownership, obviously, you have to depreciate it, but it's probably going to be a lot lower, but that land has a lot of value. So how much do you think Copart? If I went really crazy if I went hardcore activists here, and I said, "Copart, you need to spin off all your land into a REIT," and that REITs gonna pay a dividend and it's gonna take rent from you. Like how much of that 30 billion you're paying for Copart right now is covered by just the land that they owned?

Wagner: I don't know if I'm able to get the answer to that particular question.

Walker: I didn't think so. I doubt even management could give you an exact answer. They would obviously have the best data, but I figured if anybody could tell me, you'd be the guy to be able to get out there.

Wagner: That sounds like an Eddie Lampert thing.

Walker: The nice thing here is... Sears, everybody knew the future of Sears was going to be troubled. Though, if you look back at Eddie Lampert's letters in like 2006-2007, he saw where the world was going very clearly where the retail world was going. The issue is he had a very poor horse and Sears and he was not the operational manager who could he couldn't have transformed any business, but particularly a really troubled turnaround like Sears, he was not the operational manager for but yeah, there is land value, and that can be extracted, that can be extracted at some point, whether it's just running these great or at some point in the future, maybe they do something. But yeah, let's turn to the international operations. So that's where I'm a little less familiar. I've seen people talk about, I think the international operations aren't quite as profitable as the US. But I've also seen people and you mentioned at the start, how the international operations just the way they work with the insurance and everything has the potential to be more profitable. So I want to ask, I'll just flip it over to us to talk about the international operations, and then we'll probably have some follow-up questions.

Wagner: Yeah. So kind of a big opportunity internationally. They say they operate in more than 100. Sorry, they say they operate in, like more than 100-something countries, I don't remember the exact number. But it doesn't mean they have salvage yards and all of those countries. That just might mean they have people who buy cars from all of those countries.

Walker: They've got one buyer in Egypt, who's buying from a lot somewhere in Europe and that's it, Egypt's on the list.

Wagner: Yeah, I would guess that something like that. They have salvage yards in just 11 countries. And the big opportunity right now is the European market, which is very close to the same size as the North American market. I would argue they're basically close enough to call them the same size. And what the management decided to do was go into Germany first and get things figured out in Germany. And once they have their business kind of expansion plans, honed in and figured out in that one country, then duplicated everywhere else in the rest of Europe. And it's been a little difficult for them. because they have to enter this new market where they don't really exist and persuade the players in the existing market that using their service is the best option.

Walker: So, let me ask you a quick question there, right? Because originally when we were talking about we were saying how it and we were specifically talking domestically, oligopoly-domestically be really difficult for a new person to enter. And if I flip this around, and I said, "Hey, Andrew, I know the best salvage yard operator in Germany, they're a great 30-year track record of beating the S&P, great margins, great capital allocation, great operator. they're going to come over to the US, and they're going to start, they're going to do the same thing." We'd laugh at them. We'd say, "Oh, well, Copart and IAA have 85% of the market," like, how are they going to take share? Are they gonna go buy a couple of mom and pops? Great, good luck there. They're gonna do some startups? Great. Good luck there. So when Copart says they're gonna do this, my first thought is, yeah, that's really attractive. These guys have proven they kick IAA's butt operationally. They're huge, but how are they going to grow this? It seems like they have to do some pretty transformational acquisitions because it feels like this business has already been built out, are they really going to be able to organically grow throughout domestic throughout Europe? It feels like it's built out and there's not that much market share for that.

Wagner: So I think the way I look at it anyway, is that it's a mature business in the US. But it's not as mature of a business in Europe. It's still fragmented, it hasn't been consolidated yet. So they can come in and they can buy a few. And Copart has much more liquidity in their auction space than probably anybody else. So if there's a mom and pop salvage yard in Germany, and I know they wouldn't do this, but say they put theirs right next to it, they could sell worldwide, and the mom and pop one probably can't really sell to anybody beyond a couple of towns over or something like that.

Walker: You talked about, it's that great network effect, when you run a marketplace business that matches buyers and sellers, right, you are the best natural buyer, because everything you buy, you plug into your system, and they instantly have more buyers on the marketplace, which makes the business more value because they'll get higher realized prices, they'll get faster prices like all that it's just this great flywheel reminds me of Salesforce goes and buys a company for 10 times revenue, and the next day, they plug it into all their systems and distribution goes up 5x and 10 times revenue becomes two times revenue really quickly, right? Am I thinking about that correctly?

Wagner: Yeah, that's exactly how I would describe it. I guess to go back and answer your question a little bit about how the European market is not quite as profitable for them yet. I would say that it's because they're still building those relationships with the insurance companies. And they're investing in the future of their business by doing this. And what they're doing is they're approaching them. And they'll say, our normal business is to have the insurance company just put the car up on the auction, and we take a cut. But since the insurance companies are not comfortable with that, what they're doing instead is saying, we'll just buy the car from you. And we'll put it in our auction. And we'll prove that you get a better price this way. So they're not making as much money doing this. But over the long term, that's going to be the right strategy.

Walker: Yep. That's great. There was a line in the most recent, I think it was the most recent earnings call where they said, Hey, we're thinking about an analyst said, I heard a loose competitor or something talk about ancillary service. I think, in that case, it was they were talking about offering transportation, and Copart responded, we think about this a lot. We know that there's a whole ecosystem that's built around our business, and that could be all sorts of things, getting the car to our salvage yards, getting the car from our salvage yard sensor. There's all sorts of other things that I'm not thinking about because I'm not an expert. Is there anything on the ancillary service side that you think is the low-hanging fruit? Do you get excited about that opportunity? Or I think a bear, a pessimist would push back and say, hey, Copart has been around for 30 years. These guys are economic animals. If there was a lot of low-hanging fruit on the ancillary service side, they probably would have already fought that.

Wagner: Yeah, it's really tough because when management has plans like that, they just don't like to talk about them until it's almost ready already. So for example, when they're with their expansion into Germany, they just didn't talk about it at all for a few years. And then one day they said, oh, we should probably talk about this because it's kind of big right now. In terms of ancillary services, I haven't seen much from what they might want to do. In my opinion, it would be very interesting to see them expand more into used cars that are not salvaged title vehicles, just to see what would happen with that market. And I know that's a more competitive market. But it would be an interesting natural kind of expansion.

Walker: So are you talking about getting into used cars [inaudible] where they're gonna buy and sell used cars?

Wagner: Not buy and sell, just offer their auction space as a place for people to sell their cars.

Walker: It feels that feels a little different, right? Because at that point, I mean, you're talking about selling it to consumers, right? So you're talking about a different breed of cars. I mean, their cars are really scraps and liquidation stuff, you're talking about a different breed. Right now, they've got buyers where their buyers are people who need scrap parts or who are looking for kind of junkers or refurbishes. At that point you're talking about, you're looking for actual consumers, it just feels like a different skill set.

Wagner: I would say yeah, it is a little bit different. It's the only natural expansion that I could think of. But stuff like towing services is also possible. But in terms of what their core business is, that's the only thing I could think of. Now, obviously, you wouldn't sell a high-end car, unless it's already been wrecked. And if you go on their site, you can get a Rolls Royce, if you want to. It's totally trashed, which you can get a cheap one if you want to.

Walker: Yeah, I'm laughing because I feel like this is a value pod, Yet Another Value podcast. And I feel like there's some value investors you heard that are like, "Oh, Rolls Royce, it's trashed but I can get it at a discount. I'm here. Let's do this."

Wagner: Yeah, huge discount.

Walker: Last thing. I've got one last question or two last questions, actually. But before I get there, I just want to ask you, we've talked about a lot. We've talked about valuation, we've talked about international expansion, we've talked about their moats. Is there anything so far that you think we should have hit a little harder that we didn't hit quite hard enough, or anything that we haven't talked about that you think should be mentioned upside downside, however you want to look at it?

Wagner: I think maybe the long-term trends that affect this industry, I think, deserve a little bit of a mention, because that's definitely been a very powerful driver of their business over 10 or 20 years. The biggest one, in my opinion, is the total loss frequency, which is basically like, the chance that any given accident will be considered a total loss. So you have an accident, how likely is your car going to be considered totaled? And if it's totaled, then it's going to go on Copart's auction site, and that has increased, I can't remember the exact numbers things like 15 to 20% over the past 10 or 20 years or so.

Walker: I think you had... to steal from I believe it was your blog post actually, it said in the 80s or 90s, 4% of cars were considered totals after racks. If I'm remembering coffee, I've actually got the thing pulled up. And today because and I'll let you talk about the drivers who have done it. It's about 20% of cars are considered totaled after racks. Am I remembering that correctly?

Wagner: Yeah, I think that was somebody else's blog, but those are the numbers, yeah. Mine was just the past 20 years or so, I didn't go quite back that far.

Walker: Okay. Yeah. I'm looking at your blog now. You had the past 10 years, it's gone from about 15 to about 20. Do you want to talk about why that total loss frequency is going up?

Wagner: Yeah, there's really two main reasons why. One of them is because the vehicles on the road have gotten older on average. And an older car, when it's in an accident is much less likely to be worth repairing. Mostly because it's not worth as much but with an older car, you wreck it. If you're thinking about it personally, you'll say yeah, I probably wouldn't fix that. The other one is that for newer cars fuel efficiency standards may have meant that we switch more to using aluminum than steel. And the people I know in the industry say that it cost more to fix aluminum damage than steel. I've heard different opinions but the people I talked to said aluminum costs more. And then the other one is that there are many, many more electronic components, young brand new cars, and those are very expensive to replace.

Walker: Yeah, no, 100% agree. I mean, I just think like, my mom just got a new car. And I was visiting her a couple of weeks ago and driving around and she's got one of those fancy new rear view cameras, right. And it's so nice when you turn that rear view camera on, it's better than my big screen TV. The view is so crystal clear. It's perfect, but if you got into a fender bender, and it took out that camera, like, yeah, a fender bender that just took out that camera, you'd probably replace it. Or maybe you wouldn't even replace that camera. But if you got into a little bit more, and it took out that camera and a couple of other sensors, you can see that cameras going to be a lot more expensive to replace them, like just kind of the traditional oh, just put a new fender on it. Am I thinking about that correctly?

Wagner: Yeah, that's absolutely right. I think that's the way I would look at it. If you have a normal bumper that has no camera, it's not going to cost as much to fix that as it would if you're replacing the camera. The other thing is that there's a strange psychological effect, where you add a lot of electronic components that make a car safer for someone to drive. They drive more dangerously. So the accident rate stays about the same. People survive the crashes, but their cars don't.

Walker: Yep, yep. Tell me if I'm wrong here. It's not even that... I believe accidents have been going up pretty dramatically over the past 10 years. Unfortunately, fatalities haven't been going up but actually been going up because of the safety because probably a lot of texting and driving and all that type of stuff. Let me ask you, just on some trends, as someone who doesn't know the industry perfectly, but is getting interested based on this and everything. There are two trends that jumped out to me that I don't know how they play out. The first would be electric vehicles, the rise of electric vehicles, where every company... I watched the pelicans play, the pelicans play the playing game last night, and I was getting hit like ads left and right for electric vehicle companies, for electric vehicles from all the big car manufacturers. So I want to say, the electric vehicle scrap market, I'm guessing it's dominated by the same players. But are the economics the same there? Like, as we see more electric vehicles, is Copart going to get more profitable, or is it kind of not even matter?

Wagner: I think it doesn't matter. But I think I can add a little bit of background behind that. I think I don't know the exact numbers. But I think the electric car market is still like 2%. I'm not 100% sure of that. I'm pretty sure it's only around 2% right now. From a service standpoint, I'm not 100% sure of this either, but I think it's cheaper to service an electric car because it's just a motor and some batteries, instead of a Radiator engine, transmission, and all that other stuff, in terms of the actual mechanics of how it works. But from the perspective of this car is totaled. If you get in a crash, I don't think it's that much different. But I haven't done a lot of research on it. And I actually have seen electric vehicles show up on Copart's auction, too. You could get a Porsche, I think it's the Taycan, you could get one of those if you want it.

Walker: I wouldn't be surprised if over the long run electric vehicles were a good thing for them because I think electric vehicles... I don't know, because there are less parts in electric vehicles if I'm right, but I think electric vehicles are a little bit heavier. So I could imagine you're talking like electric vehicles when they get damaged because they've got lots of really sensitive sensors and everything in them. They're very quickly scrapped. And because they're heavier, you get more of a local network effect for the scrap yards. I don't know for sure. That's just a hunch I have, but I'd be interested in more.

What about over the long term, 10 years ago, all of my friends had cars. And I live in New York City so it would be different now. But nowadays, 10 years ago, all my friends if they were getting married, would have two cars, right? They and their wife would have cars. And nowadays a lot of my friends who don't live in New York, have one car. They and their wife share a car because they can use Uber to get everywhere or most of my friends who live in big cities, not just in New York, but any big city, they don't have a car because they'll just Uber everywhere. So my question on that is, if car ownership is going down over time, because of Uber and stuff, is that bad for Copart? Or would their verse be, hey, Uber drivers, miles are seeing the same, they're just all getting concentrated on the Uber drivers? So you're actually going to see Copart's business increase because you've got this... It's more like city driving more, I don't know, but how would you respond to that?

Wagner: That's a new one I haven't actually heard of before, where people want to drive more Ubers and things like that. Maybe that's more of a high city thing than what I'm familiar with.

Walker: This is New York City versus St. Paul right now.

Wagner: Yeah. Not even originally from St. Paul, I'm from a much smaller area. That's a very interesting line of thought. It's something I'd probably have to do more research on. But my initial thought is that it probably won't have a huge impact. And something that's a little more short-term. But what's happened, at least here and in other cities I'm familiar with, is people have stopped taking as much Uber they've stopped taking as much public transit. And they've been driving more because they don't want to get COVID. So I'm not sure of the long-term perspective on something like that, I would guess that it's not a huge effect.

Walker: I do wonder, just two things on this. A, to prove that I'm not too New York City biased here. Like when I used to go on business trips, I would rent a car every time, and starting about five years ago, when I went on business trips, I wouldn't run a car, I would just Uber to the hotel, Uber anywhere needs to go and it would end up being a lot cheaper and a lot easier to just Uber versus renting a car for a day or two. So just to prove that I'm not completely using my big-city bias. Then the second one, you mentioned something about... I can't remember anymore. I can't remember the second point. But look, I think we've gone for almost an hour, I think we've covered Copart very well, I think is a very interesting compound or type of business. It's funny because some of the pitches on here will come in and be like, it's a binary, there's a judge's ruling coming out tomorrow, and the stocks either gonna go up 3x, or it's going to be a zero. And I think it's probably going to be 3x within some compounders. It's just funny to see the response and the different pitches, that's why I like podcasts. But anything else you want to mention about Copart before we kind of wrap this up?

Wagner: The only thing I would add is that you really want to hope that one of the vehicles you drive never ends up on their auction site. That's at least the way the site is now you wouldn't want that to happen to you.

Walker: That is certainly true, but I would add on top of that and say, you don't want it to end up on their site, but it's probably better for them ending up on the site, then following Andrew's lead and going and trying to rebuild it yourself.

Wagner: Yes, I agree with that too.

Walker: Well look, Andrew put up a great blog post on Copart. There's a lot of charts that explain some of the trends that we talked about. I think we did a nice job talking about them, but you can visualize them, which always helps. I'll include a link to the blog post in his blog in the show notes, but wagnerroadcm.com is his blog. Then the book, which I didn't know about, but the book is Economics of Online Gaming. If I've got that right, I'm gonna find it on Amazon and include a link to that in the show notes. Andrew Wagner, thank you so much for coming on, and I know you've got some other interesting things in the portfolio. I'm looking forward to having you on for the second time in the future.

Wagner: Oh, I'd love to, thank you.

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