CopartCopart(CPRT)(CPRT)

Dan DeRose Jr.Dan DeRose Jr.

Presented December 5, 2006Presented December 5, 2006

Presentation OutlinePresentation Outline

CompanyCompany overviewoverview RCMP positionRCMP position MarketMarket overviewoverview IndustryIndustry overviewoverview

Porter’s five forcesPorter’s five forces FirmFirm strategy and developmentstrategy and development Stock PerformanceStock Performance Portfolio fitPortfolio fit FirmFirm PerformancePerformance

DupontDupont analysisanalysis Margins analysisMargins analysis

ValuationValuation DCFDCF

RecommendationRecommendation

Part 1: Company Part 1: Company overviewoverview

CopartCopart – – TheThe BusinessBusiness

Business: salvage vehicle sales and services Business: salvage vehicle sales and services provider with 122 locationsprovider with 122 locations

Suppliers: Financial institutions, vehicle leasing Suppliers: Financial institutions, vehicle leasing companies, automobile rental companies, companies, automobile rental companies, charities, automobile dealers, insurance charities, automobile dealers, insurance companiescompanies 83% of vehicles from insurance companies83% of vehicles from insurance companies

14% from State Farm14% from State Farm Vehicles either damaged in accident or stolen Vehicles either damaged in accident or stolen

and claim already paidand claim already paid If in accident, deemed total loss if If in accident, deemed total loss if

repair cost > ACV - salvage repair cost > ACV - salvage valuevalue

Copart – The BusinessCopart – The Business

Customers: vehicle Customers: vehicle dismantlers, dismantlers, rebuilders, used rebuilders, used vehicle dealers, vehicle dealers, exportersexporters

Sales ProcessSales Process

VBVB22 – Virtual Bidding Second Generation – Virtual Bidding Second Generation Internet based auction-style model with Internet based auction-style model with

registered participantsregistered participants Shows highest current price, enter highest Shows highest current price, enter highest

amount willing to pay, BID4U feature will amount willing to pay, BID4U feature will incrementally bid for you (EBAY)incrementally bid for you (EBAY)

Affect: increased pool of available buyers and Affect: increased pool of available buyers and added competitionadded competition

FY 2006 – 50% of sales made to out of state FY 2006 – 50% of sales made to out of state buyers (24% out of country)buyers (24% out of country)

Sales AgreementsSales AgreementsVehicle Processing ProgramsVehicle Processing Programs

Percentage Incentive Program (PIP) – sell all Percentage Incentive Program (PIP) – sell all salvage vehicles at a predetermined percentage salvage vehicles at a predetermined percentage of sales priceof sales price

Revenues directly linked to sales priceRevenues directly linked to sales price Provide transport of vehicle to facility, Provide transport of vehicle to facility,

storage, DMV processing at no expensestorage, DMV processing at no expense Fixed Fee Consignment – generally $50 - $175 Fixed Fee Consignment – generally $50 - $175

Charge extra for transportation, storage, Charge extra for transportation, storage, processingprocessing

ServicesServices

CoPartFinder – search engine enabling users to CoPartFinder – search engine enabling users to locate used parts quickly and efficientlylocate used parts quickly and efficiently Lists vehicles recently sold through VBLists vehicles recently sold through VB2 2

Allows vehicle dismantlers and resellers to streamline Allows vehicle dismantlers and resellers to streamline parts sale process and access a large pool of buyers parts sale process and access a large pool of buyers (incentive)(incentive)

Virtual Insured Exchange (VIX) – venue for Virtual Insured Exchange (VIX) – venue for insurance companies to enter vehicle into live insurance companies to enter vehicle into live auction to establish true valueauction to establish true value

ProQuote – proprietary software service that ProQuote – proprietary software service that assists suppliers in vehicle claims evaluation assists suppliers in vehicle claims evaluation process by providing online salvage value process by providing online salvage value estimatesestimates

Part 2: RCMP PositionPart 2: RCMP Position

RCMP PositionRCMP Position

Transaction historyTransaction history 20032003

BOT 1000 at $7.82BOT 1000 at $7.82

Gains & LossesGains & Losses BV of holding: $7820BV of holding: $7820 Realized capital gains: $0Realized capital gains: $0 Unrealized capital gains: $21,980Unrealized capital gains: $21,980 Market value of holdings: $29,800Market value of holdings: $29,800

RCMP PostionRCMP Postion

Portion of portfolio Portion of portfolio market value:market value:

Market Portfolio

7%

18%

9%

15%5%

13%

6%

9%

2%

4%

6%

6%AEE

AEOS

CPRT

FR

JKHY

JPM

KMB

MS

MVSN

SRCL

SRZ

WAG

Part 3: Market overviewPart 3: Market overview

Market OverviewMarket Overview

Road congestionRoad congestion Between 1982-2002, miles traveled increased 79% while Between 1982-2002, miles traveled increased 79% while

highway lane miles increased 3%highway lane miles increased 3% Congested roads grew from 34% to 58% during same periodCongested roads grew from 34% to 58% during same period

Current situationCurrent situation 2000 Federal Highway Administration report states “the 2000 Federal Highway Administration report states “the

average annual Cost to Maintain Highways and Bridges average annual Cost to Maintain Highways and Bridges projected for the 2001-2020 period is $11.3 billion (17.5%) projected for the 2001-2020 period is $11.3 billion (17.5%) higher than 2000 expenditures, while the Cost to Improve higher than 2000 expenditures, while the Cost to Improve Highways and Bridges exceeds current spending by $42.2 Highways and Bridges exceeds current spending by $42.2 billion (65.3%)”billion (65.3%)”

““Comparison of Spending and Investment Requirements”, Comparison of Spending and Investment Requirements”, 2002 Status of 2002 Status of the Nation’s Highways, Bridges and Transit: Conditions and Performancethe Nation’s Highways, Bridges and Transit: Conditions and Performance..

Market OverviewMarket Overview

Automobile designAutomobile design Manufacturers are incorporating certain design Manufacturers are incorporating certain design

features that increase passenger safety features that increase passenger safety Unibody construction, passenger safety cages with Unibody construction, passenger safety cages with

crumble zones, plastic components, airbags, and computer crumble zones, plastic components, airbags, and computer systemssystems

Safety features will make it more likely for vehicles to Safety features will make it more likely for vehicles to be deemed total losses if involved in accidentbe deemed total losses if involved in accident

Gasoline pricesGasoline prices Shrink margins under PIP programShrink margins under PIP program Significant increases could lead to reduction in miles Significant increases could lead to reduction in miles

driven per car and a reduction in accident ratesdriven per car and a reduction in accident rates

Part 4: Industry Part 4: Industry OverviewOverview

Porter’s 5 ForcesPorter’s 5 Forces

Power of Custome

rsLOW

Power of Custome

rsLOW

Industry RivalryMEDIU

M

Industry RivalryMEDIU

M

Threat of Substitut

esHIGH

Threat of Substitut

esHIGH

Power of Supplier

sHIGH

Power of Supplier

sHIGH

Threat of new

entrantsHIGH

Threat of new

entrantsHIGH

Overall Threat Level:High

Overall Threat Level:High

Part 5: Firm strategy Part 5: Firm strategy and developmentand development

Firm Strategy and Firm Strategy and developmentdevelopment

Acquire and develop new salvage vehicle Acquire and develop new salvage vehicle facilities in key marketsfacilities in key markets Opened 11 facilities is FY 2006 and 10 in FY 2005Opened 11 facilities is FY 2006 and 10 in FY 2005

Pursue national and regional vehicle supply Pursue national and regional vehicle supply agreementsagreements Primarily with insurance companiesPrimarily with insurance companies

Expand service offerings to suppliers and buyersExpand service offerings to suppliers and buyers Expand offerings to include offering software that can Expand offerings to include offering software that can

assist suppliers in expediting claims and salvage assist suppliers in expediting claims and salvage management tools that integrate databasesmanagement tools that integrate databases

Refine VBRefine VB2 2 and continue to integrate into and continue to integrate into acquired facilitiesacquired facilities

Part 6: Stock Part 6: Stock performanceperformance

Stock performanceStock performance

Stock price: $29.80Stock price: $29.80 52 week range: $21.14 - 52 week range: $21.14 -

$30.39$30.39 CPRT vs. NASDAQ and CPRT vs. NASDAQ and

S&P for 1 year and 5 S&P for 1 year and 5 year intervalsyear intervals

Stock performanceStock performance

CPRT vs. KAR (ADESA) CPRT vs. KAR (ADESA) for 1 year and 5 year for 1 year and 5 year intervalsintervals Only pure player Only pure player

competitor competitor

Part 7: Portfolio fitPart 7: Portfolio fit

Portfolio fitPortfolio fit

AEE AEOS CPRT FR J KHY J PM KMB MVSN MS SRCL SRZ WAG

AEE 1.000

AEOS 0.260 1.000CPRT 0.319 0.150 1.000FR 0.452 0.249 0.427 1.000J KHY 0.174 0.128 0.331 0.247 1.000

J PM 0.343 0.271 0.357 0.414 0.306 1.000

KMB 0.213 0.085 0.344 0.277 0.148 0.245 1.000

MVSN -0.020 0.092 0.169 0.199 0.208 0.214 0.087 1.000MS 0.188 0.148 0.268 0.356 0.371 0.588 0.228 0.282 1.000

SRCL 0.099 0.118 0.052 0.196 0.272 0.220 0.084 0.038 0.181 1.000

SRZ 0.180 0.008 0.104 0.131 0.213 0.096 0.104 0.083 0.153 0.176 1.000

WAG 0.159 0.206 0.198 0.193 0.247 0.148 0.175 -0.118 0.140 0.246 0.030 1.000Portfolio0.457 0.570 0.552 0.578 0.548 0.579 0.369 0.420 0.547 0.390 0.529 0.334

Correlation Matrix

Part 8: Firm performancePart 8: Firm performance

Firm performanceFirm performance FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006

Total assets over 315,064 535,846 587,099 673,023 793,528 894,705 Total equity 269,152 486,217 525,640 602,263 709,379 809,970

= Equity muliplier 1.17 1.10 1.12 1.12 1.12 1.10

Revenues over 253,889 316,456 347,423 391,014 447,731 528,571 Total assets 315,064 535,846 587,099 673,023 793,528 894,705

=Total asset turnover 0.81 0.59 0.59 0.58 0.56 0.59

Net income over 57,035 73,697 57,222 79,220 102,116 96,947 Revenues 253,889 316,456 347,423 391,014 447,731 528,571

=Profit margin 22.46% 23.29% 16.47% 20.26% 22.81% 18.34%

EM*TAT*PM =ROE 21% 15% 11% 13% 14% 12%

• ROE driven by increasing profit margin in recent periods.

• Profit margins hurt in FY 2006 by Hurricanes Rita and Katrina

Firm performanceFirm performanceMargins

0%5%

10%15%20%25%30%35%40%

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

Operating margins

Net profit margins

• Decrease to operating and net profit margins in FY 2003 caused by “increase in yard and fleet expenses due to handling increased volume at existing operations and the costs of new facilities” CPRT FY 2003 10-k pg. 24

• “The increases in yard expenses were primarily attributable to the cost of handling increased volume, a general increase in subhauling costs and the incremental abnormal costs incurred as a result of hurricanes Kartina Rita.” CPRT 10-k pg. 33

Part 10: ValuationPart 10: Valuation

Discounted Cash FlowDiscounted Cash Flow

Basic assumptionsBasic assumptions Revenues continue to show steady increase as CPRT Revenues continue to show steady increase as CPRT

continues to purchase and integrate new facilitiescontinues to purchase and integrate new facilities G&A decreases slightly over time as installation of VB2 G&A decreases slightly over time as installation of VB2

becomes completebecomes complete Must still maintain staff to service/upgrade Must still maintain staff to service/upgrade

Vehicle pooling costs increase due to increases in gas Vehicle pooling costs increase due to increases in gas prices and towing costsprices and towing costs

Under Percentage Incentive Program, can not pass these Under Percentage Incentive Program, can not pass these costs onto customer resulting in smaller marginscosts onto customer resulting in smaller margins

Discounted Cash FlowDiscounted Cash Flow

Step 1: Forecast FCFStep 1: Forecast FCF

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

Net income 57,035 73,697 60,785 79,220 102,116 96,947 141,002 166,893 195,265 240,176 278,604

Plus: Depreciation 14,350 16,308 25,545 29,649 30,466 31,456 41,863 48,142 56,326 69,282 91,166 Less: Δ in NWC - (3,929) (725) 4,935 (5,379) 6,138 18,222 11,262 14,843 23,496 17,669

Cap Ex 45,900 85,900 70,700 61,800 66,200 97,000 81,000 83,430 85,933 88,511 91,166

FCF 25,485 8,034 16,355 42,134 71,761 25,265 83,643 120,344 150,815 197,451 260,935

• Step 2: Find WACCwe = 100% β = 1.24 wd = - Tax = 39%

MRP = 6.5%rf = 4.5%

ke = 12.6%kd =

Discounted Cash FlowDiscounted Cash Flow

Step 3: Calculate PV of Step 3: Calculate PV of FCFFCF 1 2 3 4 5

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011

FCF 83,643 120,344 150,815 197,451 260,935 Terminal 3,170,240 PV FCF 74,309.37 94,984.98 105,753.15 123,004.89 1,754,574.20

Total equity value = 2,152,627

• Step 4: Subtract L-T debt and divide by shares outstanding

Total Equity Value = 2,152,627 Less: L-T Debt -

=Firm intrinsic value 2,152,627 Over: Common shares outstanding 90,445.21

+10 % 26.18$ = Value per common share 23.80$

-10 % 21.42$

Discounted Cash FlowDiscounted Cash Flow

Sensitivity analysisSensitivity analysis

Terminal Growth Rate

2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%8% 38.30$ 41.52$ 45.37$ 50.09$ 55.98$ 63.55$ 73.65$ 87.78$ 108.99$ 9% 32.12$ 34.37$ 36.99$ 40.09$ 43.80$ 48.35$ 54.02$ 61.32$ 71.05$

10% 27.52$ 29.17$ 31.04$ 33.21$ 35.73$ 38.72$ 42.30$ 46.68$ 52.16$ WACC 11% 23.97$ 25.22$ 26.61$ 28.20$ 30.01$ 32.10$ 34.53$ 37.41$ 40.87$

11.69% 21.97$ 23.01$ 24.17$ 25.47$ 26.94$ 28.62$ 30.55$ 32.78$ 35.42$ 12% 21.16$ 22.12$ 23.20$ 24.39$ 25.74$ 27.27$ 29.02$ 31.03$ 33.38$ 13% 18.87$ 19.64$ 20.48$ 21.41$ 22.45$ 23.61$ 24.91$ 26.38$ 28.07$ 14% 16.99$ 17.61$ 18.28$ 19.02$ 19.84$ 20.74$ 21.73$ 22.85$ 24.11$ 15% 15.41$ 15.92$ 16.47$ 17.06$ 17.72$ 18.43$ 19.22$ 20.08$ 21.05$

Discounted Cash FlowDiscounted Cash Flow

Downside scenarioDownside scenario Gas prices rise Gas prices rise

significantlysignificantlyTotal Equity Value = 1,780,815 Less: L-T Debt -

=Firm intrinsic value 1,780,815 Over: Common shares outstanding 90,445.21

+10 % 21.66$ = Value per common share 19.69$

-10 % 17.72$

• Worst case scenario

• CPRT loses big insurance companies as vehicle suppliers

•Remember, 83% from insurance companies and 14% from State Farm alone!

RecommendationRecommendation

HOLD all 1000 shares of CPRTHOLD all 1000 shares of CPRT CPRT has shown continued ability to CPRT has shown continued ability to

purchase and integrate new facilities purchase and integrate new facilities into current system without debtinto current system without debt

CPRT continues to develop its service CPRT continues to develop its service offerings setting the curve in the offerings setting the curve in the industryindustry

Questions?Questions?