John Reese selects stocks based on the strategies of some of the stock market's most legendary long-term investors. Copart (CPRT) is a buy in the model portfolio of his Validea newsletter based on the "Price to Earnings Growth" strategy of famed Fidelity fund manager Peter Lynch.
Copart is a provider of online auctions and vehicle remarketing services. The company provides vehicle sellers with a range of services to process and sell vehicles primarily over the Internet through its virtual bidding third generation Internet auction-style sales technology (VB3).
Its offerings include Online Seller Access, Salvage Estimation Services, Estimating Services, End-Of-Life Vehicle Processing, Virtual Insured Exchange (VIX), Transportation Services, and Department of Motor Vehicle (DMV) Processing as well as CashForCars.com and U-Pull-It.
DETERMINE THE CLASSIFICATION:
This methodology would consider CPRT a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (33.28) relative to the growth rate (30.06%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for CPRT (1.11) is on the high side, but is acceptable if all the other tests are met.
SALES AND P/E RATIO: PASS
For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CPRT, whose sales are $2,042.0 million, needs to have a P/E below 40 to pass this criterion. CPRT's P/E of (33.28) is considered acceptable.
INVENTORY TO SALES: PASS
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive. Inventory to sales for CPRT was 0.93% last year, while for this year it is 1.03%. Since inventory to sales has not changed appreciably, CPRT passes this test.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.
This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for CPRT is 30.1%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is acceptable.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for CPRT (22.56%) to be acceptable (equity is three to ten times debt). This ratio is one quick way to determine the financial strength of the company.