Podcast Summary
Requirements for Finding Companies that Can Reach 100 Baggers: To identify potential 100 bagger companies, look for consistent earnings growth and reinvestment, prioritize early-stage businesses, and high insider ownership. Consult a financial advisor before making investment decisions.
To find companies that can compound capital and reach 100 bagger or multibagger status, investors must look for businesses that can grow their earnings year after year and reinvest back into the company, rather than paying out dividends or doing large share repurchases. Additionally, investors should look for companies in their earlier stages of growth and with high insider ownership, as managers who own a lot of stock tend to think long-term and make decisions that benefit long-term shareholders. Topicus and Copart are two quality compounders that fall in line with this strategy, however, nothing in this podcast should be used as financial advice. Please consult a professional before making any financial decisions.
Analyzing Competitive Advantage & Valuation in Company Investment: Investing in quality businesses with strong competitive advantage, reasonable valuation, compound at high rate, skilled managers and rock-solid balance sheet can provide exponential returns over time.
When investing in a company, it is important to analyze the competitive advantage it holds. Companies that have a strong competitive advantage are likely to grow over a long period of time and provide better returns. Valuation is also an important factor. One should ensure they pay a reasonable price for the company they like to get decent returns. Identifying companies that have historically compounded at a high rate of return, with highly skilled managers, and can reinvest cash flows at an above average rate of return is essential. Investing in companies with a rock-solid balance sheet lowers the risk of permanent loss of capital. Overall, investing in quality businesses for a long period of time and at a reasonable valuation can provide exponential returns.
Topicus follows Constellation's approach, with a niche serial acquirer strategy and decentralized culture for exceptional capital allocation.: Topicus follows a proven strategy for growth by focusing on niche acquisitions, decentralized culture, and exceptional capital allocation, resulting in exponential revenue growth and increased EBITDA margins.
Topicus, a European company with a 5 billion market cap, is following the successful approach of Constellation by being a niche serial acquirer with a decentralized culture and exceptional capital allocation. Topicus had similar beginnings as Constellation as they started acquiring VMS businesses with a nest egg of capital from selling their own business. Robin Van Poelje, the CEO of Topicus, was also the CEO of TSS which was acquired by Constellation in 2013. Under the ownership of Constellation, Topicus increased revenues by 20% annually, grew their EBITDA margins from 18% to 33%, and completed 17 acquisitions in 2020. Topicus.com, a Netherlands-based VMS business, merged with TSS to become a separate spin-off and is open to doing more acquisitions for future growth.
Topicus' Advantage in the European VMS Market: Topicus has a structural advantage in the less fragmented VMS market, allowing for numerous acquisition opportunities to grow organically. Their decentralized structure and partnership with Constellation offer a strategic advantage to make larger acquisitions at lower hurdle rates.
Topicus, backed by Constellation, has a structural advantage in the European market due to its less fragmented VMS market, which offers many acquisition opportunities for Topicus to reinvest cash flow and grow organically. With Topicus experiencing over 10% organic revenue growth historically, they have an advantage to acquire small VMS businesses with little access to capital and help them grow at high rates. The company has a decentralized business structure, which allows them to scale the number of acquisitions they do year after year. Being part of Constellation, Topicus learns from some of Constellation’s mistakes, such as paying out special dividends instead of using that capital to make larger acquisitions at slightly lower hurdle rates.
Topicus and Copart – Two Unique Investment Opportunities in Different Markets: Topicus offers high earners a cash bonus plan for shares with potential for attractive acquisitions and resilient business models, while Copart has a strong competitive advantage with economies of scale and network effects. Consider the risks and opportunities before investing.
Topicus offers a cash bonus plan to high earners that requires a minimum four-year investment in shares, ensuring existing shareholders aren't diluted and managers act in the best interest of shareholders. They have a resilient business model that thrives during recessions and has potential to make attractive acquisitions due to decreased competition. At a price to free cash flow multiple of 25, Topicus has a fair valuation for a company in its early growth cycle, with an annual revenue growth of 29% over the past three years. However, there are risks associated with their long-term success solely operating in Europe and the possibility of Constellation selling their shares. Copart, on the other hand, offers economies of scale, network effects, and barriers to entry, making it a prime example of a company with a strong competitive advantage.
Copart's Success Factors and Financial Strengths: Copart's success in the salvage vehicles space is attributed to its natural advantages, high barriers to entry, and strong financials, including service revenue accounting for over 80% of total revenue, strong balance sheets, and high return on invested capital.
Copart is a successful business in the salvage vehicles space due to its natural advantages, such as owning the land and the network effects of its buyers and sellers. Another significant advantage is the high barrier to entry, making it difficult for competitors to develop similar relationships and secure zoning permits. Copart's revenue streams include service revenue and purchased vehicles revenue, with service revenue accounting for over 80% of total revenue for the fiscal year 2022. Copart enjoys strong financials, with annual revenue and free cash flows growth, strong balance sheet, and high return on invested capital. The company is a testament to the quality of its management team, which invests back into the business, produces free cash flow, and pays substantial dividends to its shareholders.
Copart's Reinvestment Strategy Gives Them the Edge Over Competitors: By focusing on growth and reinvesting back into their business, Copart has gained a strong position in the market, leaving their main competitor IAA behind. Their advantage is difficult for others to catch up to, and they still have room to grow and take market share.
Copart's reinvestment back into the business and focus on growth instead of paying dividends has given them a substantial compounding advantage over the years and an insurmountable lead over their competitors. Their strong balance sheet, network effect, and experienced management team sets them apart from IAA, their main competitor who neglected reinvestment on leased land. Copart's market share continues to march upward year after year while IAA is losing market share. The first mover advantage in a marketplace business like Copart is very difficult, if not impossible, to capture by the second mover. There's still room for Copart to grow and continue to capture more market share from IAA and overall industry expansion.
Copart's Dominance in the Salvage Car Industry: Copart's strong physical and online presence with high barriers to entry, insider ownership alignment with shareholders, and long-term thinking with share repurchases makes them a dominant player in the salvage car industry.
Copart is a dominant player in the salvage car industry due to high barriers to entry. They have physical yards all over the country and also an online presence, making it difficult for competitors to enter. Their strong balance sheet enables them to serve their largest customers, such as insurance companies, during natural disasters. Insider ownership looks really good, with substantial alignment of interest with shareholders. Copart’s managers always think long term and are opportunistic about performing share repurchases when the intrinsic value of the shares is more than the share price. Their return on invested capital has been consistently strong in recent years. Copart's partnership with Geico after Hurricane Harvey exemplifies their commitment to taking care of their customers.
Copart's Balanced Strategy for Long-Term Success: Copart's focus on long-term relationships, opportunistic buybacks, and expansion into international markets, combined with the tailwind of technology and the low risk of autonomous driving, positions them for continued success in a growing market.
Copart's slow rate of change is balanced by long-term relationships with customers and attracting business from competitors. Their managers act like owners and hold cash for opportunistic buybacks. Copart doesn't pay dividends, and the rise of technology in cars is a tailwind for their business. The risk to Copart from autonomous driving is low, and expansion into international markets mitigates the impact of autonomous driving in the US and Europe. The growing EV market benefits Copart as well. Copart operates in a large and growing market with a solid balance sheet of $1.4 billion in cash. Despite not being cheap, Copart shows strong international growth and is stealing market share from competitors like IAA.
Copart's Consistent Growth and Resilient Revenue Prospects: Despite being a "junkyard type" business, Copart has shown impressive growth and resilience during crises. With expectations of continued earnings growth and the potential for solid returns, joining the TIP Mastermind community can provide valuable insights and stress testing for investment ideas.
Copart has shown a consistent growth in net income of 21% annually over the past five years with a net income of $1.1 billion over the trailing 12 months. Due to the high market cap of $37 billion, it has a multiple of 34 currently. The market is currently pricing in earnings growth of around 13 to 14% over the next five years. If Copart grows their earnings at 13% over the next five years, and the multiple compresses down to a multiple of 25, the stock is expected to return around 10%. Copart's revenue showed resilience during the great financial crisis, and their business is tied to the automobile market, which means that even during a recession, people still drive their cars and accidents still happen. Copart is a 'junkyard type' business, and due to this, it will not get a lot of attention from retail investors. Encouragement for joining TIP Mastermind community is also given, where one can source ideas from others as well as stress test their own ideas.
