How Copart Makes Money From Car Accidents
Have you ever wondered what happened to your car after it was totaled? You may be surprised to learn that an entire economic ecosystem is built around what happens to cars after an accident. Copart (NASDAQ: CPRT) plays a significant role in this ecosystem and has found a way to make money from car accidents.
In this video from the Industry focus Podcast, recorded on March 11th, Motley Fool contributor Luis Sanchez and Industry focus Moderator Nick Sciple talks about Copart and the market for used and totalizers.
Nick Sciple: Absolutely. I want to touch on the companies in this ecosystem that we wanted to talk about today. One of the most important is Copart. If the insurance company decides to put your car up for auction, Copart will help them do it. Your ticker is CPRT. Well, where does Copart fit into this process? After you’ve added up your car, you’ve decided that the repair will cost more than it’s worth, what happens to your car afterwards and where does Copart get into the process?
Luis Sanchez: Copart is essentially an industrial marketplace. Your customers are essentially the people trying to get rid of their cars, so really insurance companies. There are a few other potential sellers of cars, but insurance companies are the vast majority who will take possession of the write-off cars. Essentially, totally destroyed cars are shipped to these huge lots that are outside of the big city areas and they basically just run an auction that is done online and in person and there are all kinds of people trying to get those broken down cars to buy . I think the other question is who the buyers are and why they might be interested in the car. There are really all possible participants. There is a large participation of overseas buyers, about a quarter of the people who buy totaled cars. There is an interesting reason for this, because the definition of a total write-off car may actually be different in the US than in any other country. Indeed, it might be more economical for a buyer in another country to buy a broken or totaled car in the United States, and the cost of repairs might be lower in that other country, or it might just be more difficult to buy that make of car in this one other country. There are also so-called dismantling companies that actually buy the car, sell all the car parts that are still valuable and then simply scrap the car. There might just be a few scruffy repair shops out there that just know they can fix the car and sell it for a profit.
Scheme: So basically, Copart connects these sellers who have cars they don’t want, or insurance companies, to all of these different buyers out there who for some reason have some interest in those products. Be it because you want to arbitrate repair costs in different countries, or you are looking for a classic car that is only offered for sale because you get one from a truck with a total write-off, or something like that. Copart really helps connect buyers and sellers in this market. Where does Copart get value for itself from this process?
Sanchez: They primarily make money by taking a commission from the auction. It’s roughly a 10% commission they take and that depends on what the car stands for. The really interesting thing about this, as mentioned above, is the value of the used cars has gone up a lot and that was actually a benefit for Copart as they benefit from a higher auction price. So your interests coincide with your customers, you could say. It’s the primary way of making money. There are also some minor matters. They sell access to the data to potential buyers, they sell technology that could be used to bid at auctions. An example of this could be when you are a foreign buyer and want to use more advanced techniques to bid on cars. Say you want to have a price monitor, much like an algorithmic trading robot, it may charge a little more for it. They also do the inspection or deal with the title, transfer the car. It is also interesting that there is a service that automatically repays the car loan as soon as the proceeds from the sale of the car have been offset. They help the insurance company automate the process of getting the car loan and transferring ownership. So there are a few little ancillary services here and there that can make them some extra cash, but the vast majority of their finances are really driven by the income from the sales.
Scheme: Absolutely. The more cars that are sold and the higher the value of those cars, the better it is for Copart. I think part of the driver for this is the speed at which vehicles are summed and that has been some tailwind for the business. If you look back on the last 10 years or so, the rate at which cars were totally or totally damaged has been a benefit to them. In addition, there may be fluctuations in used car prices.
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