Standing out among the Street's worst performers today is Copart, a auto retail company whose shares slumped -3.1% to a price of $48.9, 11.1% below its average analyst target price of $55.0.
The average analyst rating for the stock is buy. CPRT underperformed the S&P 500 index by -2.0% during today's morning session, but outpaced it by 24.3% over the last year with a return of 45.7%.
Copart, Inc. provides online auctions and vehicle remarketing services in the United States, Canada, the United Kingdom, Brazil, the Republic of Ireland, Germany, Finland, the United Arab Emirates, Oman, Bahrain, and Spain. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Copart's trailing 12 month P/E ratio is 35.7, based on its trailing EPS of $1.37. The company has a forward P/E ratio of 30.0 according to its forward EPS of $1.63 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.96, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Copart's PEG ratio of 1.55 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Copart's free cash flow, which was $847.57 Million as of its most recent annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, CPRT is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 26.7% and has on average been $510.09 Million.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Copart's P/B ratio is 7.32 -- in other words, the market value of the company exceeds its book value by a factor of more than 7, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 4.24 as of the first quarter of 2023.
Copart is likely undervalued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into CPRT's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
