Do you know that, despite the brutal competition in the automobile industry, there are two companies that have kept their lights on in ‘high beam’ for over 30 years, to become 300 baggers?
No, Tesla is not one of them!
As shown below, since their IPO to early June 2024, the two companies below (with market capitalisations of ~USD 50 billion each) have performed extremely well for their shareholders:
Copart – 336-bagger, with a CAGR of 21% over the past 30 years; and
Autozone – 387-bagger, with a CAGR of 20% over the past 33 years.
If we look at their share price performances in the last 10 years, they have also performed very well, at a CAGR of 28% for Copart and 18% for Autozone.
So, what do these two companies do exactly?
How have they achieved such tremendous performances for their shareholders?
Will they continue to be winners going forward?
Let’s explore these in this article.
Business Introduction
Let’s take a peek into these businesses.
Copart
Copart (founded in 1982) is the largest online salvage vehicle auction operator (and provider of remarketing services), connecting the automotive resellers (like insurance, rental car, fleet and finance companies) and buyers around the world.
It focuses on providing great customer service and plentiful land capacity to the auto insurers (to handle an influx of post-disaster salvage vehicles on short notice). This has helped to foster strong insurance relationships, to secure ongoing supplies of the salvage vehicles, and establish a network effect. This market has been a duopolistic market with IAA as the other big competitor.
In the financial year ending July-2023, Copart generated USD 3.9 billion of total revenue, with an operating profit of USD 1.5 billion, translating into an operating margin of 38%.
AutoZone
Autozone (founded in 1979) is the largest retailer of aftermarket automotive parts and accessories in the U.S., with more than seven thousand stores across the U.S., Mexico and Brazil.
The majority of Autozone’s sales relates to failure and maintenance related products that are more time sensitive and vital to the functioning of a vehicle (like alternators, batteries and spark plugs). Its customer base typically values service quality and convenience over a lower price.
Its wide localised distribution network (through its hub and spoke supply chain model) helps with quick delivery in a cost-effective manner. The large product selections have helped it to outcompete smaller players in a fragmented industry.
In the financial year ending Aaugust-2023, Autozone generated USD 17.5 billion of sales, with an operating profit of USD 3.5 billion, translating into an operating margin of 20%.
Compounding Secrets of Multi-Baggers
So, how have these two companies achieved their tremendous share price compounding over the past few decades?
Is it through high revenue growth, high profit growth, or valuation multiple expansion? And did they drive up the same path to reach their respective muti-bagger destination?
As shown in the chart below, over the past 10 financial years (FY2013-FY2023), Copart enjoyed much faster revenue growth (CAGR 14%) compared to Autozone (CAGR 7%). Their net profit growths outpaced their respective revenues, with Copart growing at 21% and Autozone at 10% CAGR.
Although Autozone had a slower growth in revenue and net profit, in terms of return on capital employed (ROCE), it actually had much higher ROCE (including goodwill) (at ~mid 40%) than Copart (at ~mid 20%).
So, Autozone (with a higher ROCE) actually needed less capital to grow its profits compared to Copart, and it had more capital left every year to return to its shareholders. [Note: This is why evaluating ROCE is so important, as we have previously discussed in this article.]
As shown in the chart below, Copart and Autozone reinvested different % of their operating cash flows (on capital expenditures and very minor acquisitions) to grow their revenues and profits, with:
Copart reinvesting 48% of OCF to generate net profit growth of 21%; and
Autozone reinvesting a lower % of OCF, at 28%, to generate net profit growth of 10%.
Because Autozone reinvested only 28% of its OCF for growth, it had relatively more capital to return to shareholders, with it returning 92% of its OCF through share repurchases (with the shortfall funded by debt).
That capital allocation, focused on repurchases, has helped Autozone to achieve a EPS CAGR (17%) that was much higher than its net profit CAGR (10%) in the last 10 financial years. That in turn supported its share price compounding CAGR of 18%, per the chart below.
In short, to compound shareholder value, both Copart and Autozone have been reinvesting capital to grow at high quality (i.e. at high ROCE, of more than 20%).
However, the biggest difference is that Copart had more avenues to reinvest its profits into the core business as compared to Autozone. Copart has been reinvesting organically into growth capex to achieve high growth in net profit. As John Burr Williams taught us in his seminal PhD thesis (later published in 1938 as ‘The Theory of Investment Value’), the most attractive business is one which has the ability to retain its earnings and reinvest it at a high return on capital.
Meanwhile, Autozone has been reinvesting less capital into growth capex (about a quarter of its OCF) to grow its net profit, but compensated by deploying a lot more capital into share repurchases. So while Autozone’s net profit growth has been much lower (less than half) than Copart’s, in EPS terms, their growth rates have been closer to each other. Autozone also managed to turbo charge its growth with the use of more debt relative to Copart.
These were just different ways of deploying capital to generate shareholder value. The end result being both achieving very high returns in the long run.
[Although arguably, driving high EPS growth through deploying capital to share repurchase might come with more uncertainty, as the results of repurchase would be dependent on the share price of the company which is outside of the company’s control (and to some extent the availability of cheap debt funding).]
Can They Continue To Compound Well Going Forward?
With such strong track records over the last few decades, can these two companies associated with the automobile industry continue to drive strong shareholder value in the future (using the same or different playbooks)?
One major change in the automobile industry has been the transition to EVs (electric vehicles).
Although it’s hard to predict the exact pace and impact of the EV transition, we know that it is happening, and this presents uncertainties to the companies in the automobile industry, including the two companies discussed.
For Copart, the transition to EV could potentially lead to less car accidents in the future (speculating here), and less vehicles totalled by the auto insurers. This could reduce the supply of salvage vehicles on Copart’s platform. Since Copart’s revenues are tied to the auctioned vehicle volumes, its revenue and profit could therefore be affected, potentially. Time will tell!
For AutoZone, the transition to EV could potentially result in less SKUs for automotive parts or accessories in the market, as EVs generally have far less moving parts than ICE vehicles. Given that part of Autozone’s competitive advantages stems from its wide distribution network carrying lots of SKUs for quick availability/ delivery in local areas, the transition to EV could hurt Autozone’s volumes.
Concluding Remarks on these 300-baggers
Overall, Copart and Autozone have both executed phenomenally to compound shareholder wealth, becoming >300-baggers in just ~3 decades (such is the power of compounding!).
Both of them seem to be strong companies, and have a strong track record of high ROCE and capital allocation to reward shareholders (albeing following slightly different paths).
However, going forward, the transition to EV could present major uncertainties for them, and hence it might be prudent to sit on the sidelines for now, to understand how the transition actually affects these businesses.
Do you think Copart and Autozone can navigate the transition and the associated challenges successfully? Do you think they can include EVs as part of their ecosystem to continue compounding well in the future? Let us know what you think in the comments below!
Note: We have identified other strong compounder companies that have less uncertainties in our Multibagger Research Series. You can check them out for free here!
Disclosure: We at MoneyWiseSmart do not own shares in these businesses under our company or individual accounts (as of the time of this article). The above should not be considered as a recommendation to buy or sell shares in these businesses.
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