Copart, Inc. (NASDAQ:CPRT) shares are up more than 55.78% this year and recently increased 2.44% or $1.03 to settle at $43.16. AutoNation, Inc. (NYSE:AN), on the other hand, is up 13.81% year to date as of 11/29/2017. It currently trades at $55.37 and has returned 6.30% during the past week.
Copart, Inc. (NASDAQ:CPRT) and AutoNation, Inc. (NYSE:AN) are the two most active stocks in the Auto Dealerships industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CPRT to grow earnings at a 22.30% annual rate over the next 5 years. Comparatively, AN is expected to grow at a 5.32% annual rate. All else equal, CPRT’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 3.53% for AutoNation, Inc. (AN). CPRT’s ROI is 24.00% while AN has a ROI of 9.40%. The interpretation is that CPRT’s business generates a higher return on investment than AN’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. CPRT’s free cash flow (“FCF”) per share for the trailing twelve months was +0.22. Comparatively, AN’s free cash flow per share was +1.63. On a percent-of-sales basis, CPRT’s free cash flow was 3.51% while AN converted 0.69% of its revenues into cash flow. This means that, for a given level of sales, CPRT is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. CPRT has a current ratio of 1.90 compared to 0.70 for AN. This means that CPRT can more easily cover its most immediate liabilities over the next twelve months. CPRT’s debt-to-equity ratio is 0.58 versus a D/E of 2.01 for AN. AN is therefore the more solvent of the two companies, and has lower financial risk.
CPRT trades at a forward P/E of 25.68, a P/B of 9.05, and a P/S of 6.33, compared to a forward P/E of 13.63, a P/B of 2.45, and a P/S of 0.23 for AN. CPRT is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CPRT is currently priced at a 16.65% to its one-year price target of 37.00. Comparatively, AN is 12.61% relative to its price target of 49.17. This suggests that AN is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.70 for CPRT and 2.90 for AN, which implies that analysts are more bullish on the outlook for AN.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CPRT has a beta of 1.24 and AN’s beta is 1.22. AN’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. CPRT has a short ratio of 6.33 compared to a short interest of 11.67 for AN. This implies that the market is currently less bearish on the outlook for CPRT.
Copart, Inc. (NASDAQ:CPRT) beats AutoNation, Inc. (NYSE:AN) on a total of 8 of the 14 factors compared between the two stocks. CPRT is growing fastly, is more profitable, generates a higher return on investment, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, CPRT has better sentiment signals based on short interest.