If you were in a room with 6,000 people and were told you were better than any of them at something important, how would you feel? Happy? Surprised?
The CFO of the most financially exceptional public company in the United States (according to a Deloitte analysis released on Tuesday) allows that being cited as such was “a great recognition.” But, adds William Franklin, who runs finance at vehicle-auction firm Copart, “I’m not surprised.” Really? “I’m just surprised it took anyone else so long to recognize us. We’ve always thought we were the best company in the world.”
The company is a service provider to auto insurers. When an insurer decides to pay off a customer whose car was damaged in an accident, rather than repair it, the insurer takes ownership of the vehicle, which it then wants to monetize. That’s where Copart comes in: it takes possession (but usually not ownership) of the car, markets it and makes it available in online auctions.
It’s not a small business, with more than $1 billion in revenue. But after a top corporate consulting firm conducted a deep, scientific analysis to identify outlying companies in the area of financial success, and considering that the one designated as the most excellent of them all is, at best, a medium-profile enterprise, CFO was eager to speak with Copart, so as to discover its secret sauce.
That proves a somewhat elusive goal, though. To be sure, Franklin, who came to the company as CFO in 2004, does point to a number of traits that indeed might be useful to most companies: “We’re all about achieving and winning.” “It’s just a great culture.” “Just a great management team.” “Everyone here rolls up their sleeves and works.” And something just a bit more tangible: “We make decisions quickly.”
The thing is, those are the kinds of generalizations that CFOs commonly utter, whether they’re true or not. You’d be hard-pressed to find one that doesn’t. Who knows: Maybe it’s just that those things happen to be true of Copart and less so of run-of-the-mill organizations.
Still, Deloitte’s analysis looked at a bevy of financial metrics. So, Copart, what’s your finance strategy? How have you managed to be such a remarkable finance machine for years and years?
“We’re very mindful of capital allocation,” says Franklin, thus becoming the latest among a passel of CFOs to tell us that in recent months. “We measure everything we do, whether buying a new [car] yard or developing a new app for our IT system. And while there’s been discussion about whether we should do this or that to keep our managing director in Brazil or Germany happy, it all boils down to what provides the best return for the business.” Prudent thinking, but hardly rare.
How about financing and capital structure? “We haven’t really looked at the balance sheet as much as other companies might have, in terms of creating value. We’ve accumulated cash, because we feel there are many opportunities ahead of us for its use.”
Then comes this nugget: “We’re not real sensitive to what Wall Street says we should be doing.” Maybe now we’re getting somewhere. A report issued by MarketWatch on Thursday offered the startling observation that the 10 stocks rated the worst investments by Wall Street analysts at the beginning of 2014 returned 19% for the year, beating the S&P 500 by five points. It gets even better. The report said that if you’d invested $100,000 in the S&P 500 index seven years ago, you’d have had $170,000 by the end of last year. If you’d invested in the 10 stocks that Wall Street liked most each year, you be slightly ahead of the market, with $180,000. If you put your money in the most hated stocks? You’d have a total of $270,000.
That’s pretty wacky. But maybe there’s actually value in paying little heed to Street analysts — although it should be noted that Copart has hardly been a “most-hated” stock. At $35, its shares are trading at 19 times its projected 2015 earnings.
It’s tempting to surmise that a chunk of Copart’s bounty must derive from the dynamics of the industry it plays in. But that’s apparently not the case. Not only did Deloitte use regression analyses to weed out industry effects on financial results, but Copart’s only major competitor, KAR Auction Services, was not among the consulting firm’s 100 top-ranked companies.
Franklin himself says he’s sure that the choices Copart management makes far outweigh industry factors as influencers of success. “First, someone had to have the vision to recognize what the opportunities were, and then how to execute them,” he says. “Also, even though we’ve grown to be a meaningful company, we still act in an entrepreneurial manner. We make decisions very quickly, and in both directions — starting and stopping.”
One category of decisions has been acquiring a number of smaller competitors over the past 15 years. The company now has 200-plus yards (average size: 40 acres), where a majority of the company’s 4,500 employees manage the inventory of cars — at any one time, about 500,000 of them worldwide — and millions of seller-buyer interactions annually.
That scale is a key to the business, according to Franklin. “A typical buyer is not interested in just any car,” he says. “Cars are not fungible. The buyer will specialize in, say, pickups or foreign cars, or BMWs or Peugeots, so that even with several hundred thousand cars in inventory, there might be only six Peugeots. So if you can provide that unique selection to buyers, they will come to you.”
An interesting twist for Copart’s business may occur if automakers’ ongoing efforts to develop “smart” cars — which scan for other vehicles, pedestrians and objects so as to avoid accidents — come to fruition. If there were few accidents, there would be no Copart.
But Franklin says he doesn’t foresee a world without car accidents for perhaps 50 to 60 years. In the meantime, he notes, there are some natural hedges that protect the business. “A decline in accident frequency would be bad for our volume,” he says, “but since smart cars would be more expensive to repair, fewer would be repaired, so the percentage of cars sent to salvage would go up.”
There’s a similar hedge with respect to used-car pricing. If pricing goes down, a car is worth less, and an insurer is unlikely to pay for repairs that approach or exceed its value. Copart gets less revenue per car, but it gets more cars, Franklin notes.
Such natural hedges do seem to be an industry-specific benefit to the company’s financial well-being. “In 2008, 2009 and 2010, when everyone’s finances were in turmoil, our operating cash flow was rock solid,” the CFO says. “In fact, we probably have the most predictable cash flow of any company you can imagine.”
It’s difficult to say whether all of this is enough to explain why Copart wound up on top of Deloitte’s list. But given the rigor of the analysis, it’s not likely a fluke. “I hope Copart doesn’t take it personally, but I’d never heard of them before,” says Michael Raynor, a Deloitte director who co-conducted the analysis. “But I don’t know that they care much about that, because they’re clearly an amazing organization — an ‘exceptional’ one certainly, by our definition, and by more than a little bit and for more than a few years.”