DONALD BAXTER
PORTFOLIO MANAGER
PHILADELPHIA FUND, INC. (PHILX)

STOCK: Copart, Inc. (Nasdaq: CPRT)
PRICE: $25.40 (as of 4 p.m. February 1)
52-WEEK RANGE: $21.00-$26.21
MARKET CAPITALIZATION: $2.30 billion

Donald Baxter is a portfolio manager at the Philadelphia fund with $89.1 million under management. Copart is a California-based technology company that facilitates online auctions of salvage vehicles for insurance companies. Mr. Baxter explains to David Dalley of The New York Sun why he believes Copart is a low-risk high-growth winner.

What does Copart do?

They run online car auctions that enable sellers, mainly insurance companies, to offload salvage vehicles quickly and easily. They’ve developed and they manage the software that does it all. Insurance companies are now buying damaged cars from policyholders with less damage than they used to be cause of this online market. They’re doing it more frequently. The software Copart has developed is very effective and people in the industry are really using it.

Why is the stock a good buy right now?

They’ve been a stealth Internet stock for a long time and it’s taken a while for people to take notice. The share price has bounced between about $21.00 and $26.00 and it’s currently trading at about $25.30. The stats on it are very favorable in my opinion. The enterprise value to EBIT DA is approx 10.8, and that’s based on trailing results. The trailing P/E ratio is 23, and the forward P/E is 18 based on estimates. It’s earnings are growing well, those P/E numbers are not high at all, you’ve got a return on equity of 15%, and quarterly revenue growth is running at over 14%. That’s all great news for investors. Their last quarterly earnings were a bit disap pointing because they lost some business due to the hurricanes. But it’s been an excellent company long term. It has a large family ownership and I think that management is really there for the shareholders.

Another important thing to think about is that this company is operating in a niche. It’s one of those areas where if the cost of doing business is not that high people will stick with it, and in this case they have. In a sense, it’s like other Internet companies, in that once they get a leading position it’s hard for another company to compete because they establish a reputation. They have the first-player advantage.

Is there still much upside potential?

Definitely, I think so. I bought some recently (slightly below today’s price). When they announced that their earnings were hurt by the hurricanes that put pressure on the price and provided a good entry point.

For a stock of this growth rate and with this level of quality in its technology to be selling at 18 times earnings is pretty good, especially considering that expected growth is up at 27% annually. The PE numbers are very reasonable.

What are the risks?

I think that more hurricanes would affect the company adversely. A lot of the country where they’re doing business was affected by the recent trouble.

But overall, there aren’t a lot of risks for this type of business. An important factor to think about is that because it’s a niche market, it isn’t really one that depends on economic prosperity. If we had a recession, for example, I can’t see why their earnings would suffer. There are so many parts of the market that are at risk in an overheated economy. Speculation is rife in the real estate market. Oil prices have gone up a lot. The energy sector is strong, but it’s hard to predict. This company, in contrast, has excellent earnings growth, and you really do face relatively little risk from a slowing economy.