Ex-Cat Units Inflect +240 bps to -4.8%, Buyback Initiated at $500M+, Stock at 12-Month Low — Upgrading to Outperform

Results vs. Consensus

Year-over-Year Trajectory

H1 FY2026 — The Half-Year Reality

The H1 EPS print is the cleanest tell: through 6 months of meaningfully negative U.S. insurance unit volume, against unfavorable cat comps and an international VAT one-time, Copart's net income grew +0.7% and EPS held flat. That is the operating-leverage thesis working at exactly the magnitude it was designed for.

Unit Volume Detail — The 240 bps Ex-Cat Improvement

Quality of Beat / Miss

Revenue assessment. The -3.6% reported revenue decline is the worst in our backfilled coverage of CPRT and is the data point the bear case will cite. The +1.3% ex-cat read is the data point the bull case will cite, and it is unambiguously the more relevant one for forward modeling: Q3 FY26 (the next print) does not lap any major cat events (Q3 FY25 was quiet), so the ex-cat read becomes the reported read mechanically. Revenue dynamics are otherwise consistent with our model: ASPs +6.0% reported / +7.1% ex-cat are the strongest ASP-capture quarter in our coverage; unit-volume drag is the offsetting force; per-unit fee revenue continues to accelerate. The +1.3% ex-cat top line is the most informative single number on the print.

Margin assessment. The reported GM of 45.0% (vs. 45.2% Q2 FY25) is optically misleading — the $6.8M international VAT one-time depressed the print by ~60 bps, and the non-recurrence of high-margin cat-related service revenue depressed it by another ~100 bps. Adjusting for these, the underlying GM expanded approximately +178 bps YoY, which is a near-exact match to Q1 FY26's +184 bps print. The margin engine is therefore intact and continuing at the same compounding rate as Q1. U.S. GM at 46.6% (vs. 48.7% Q1) reflects the same cat-comp depression on a U.S.-only basis. International segment GP +0.9% reported, but +13% adjusting for the VAT one-time — international operating margin held at 23.6% even with the headline drag.

EPS assessment. $0.36 GAAP (-9.2% YoY) is the cleanest miss in our coverage, but the math is mostly cat-comp + VAT one-time. The fundamental questions investors should ask: (1) Did the operating-leverage engine compress? Answer: No, adjusted GM +178 bps and U.S. operating margin held above 37% despite cat comp. (2) Is the H1 EPS algorithm broken? Answer: No, H1 EPS flat at $0.77 vs. H1 FY25, despite all the headwinds discussed. (3) Did the buyback contribute to EPS this quarter? Answer: Marginally — most of the buyback happened in Q2 and through February (post-quarter), so the share-count benefit is back-half-loaded into FY26. Each of these reads is supportive of the franchise even as the headline number disappoints.

Segment & Geographic Performance

U.S. Segment — The Ex-Cat Improvement Is Real

U.S. segment is at the heart of the upgrade thesis. The headline U.S. revenue of -5.5% reported is roughly flat on an ex-cat basis. The underlying mix dynamics are favorable: U.S. insurance ASPs +6.0% / +9.0% ex-cat (best ASP quarter in our coverage), U.S. non-insurance ASPs +2.0%, dealer (CDS) units +5.0% (sustained share gain), and the residual softness in commercial consignment (Blue Car -11.8%) is timing-driven (rental fleet repair-vs-sell decisions) rather than secular. U.S. GP -7.2% reported / -1.6% ex-cat; U.S. GM at 46.6%; U.S. operating margin 37.1% — only modestly below the 39.4% Q1 print and well above the 5-year average. The story is "underlying U.S. unit drag of -4.8% ex-cat is being absorbed by ASP capture and mix discipline; per-unit economics still the best in the franchise's history."

Assessment: The ex-cat 240 bps improvement in U.S. insurance units (from -7.3% Q1 to -4.8% Q2) is the most important single data point of the entire print. If Q3 FY26 confirms continued improvement (a clean -2 to -4% ex-cat read would be ideal; even a stable -4 to -5% confirms the trajectory), the unit decline has likely bottomed at around -5% for the cycle. The path back to positive U.S. insurance unit growth runs through (a) earned-car-years stabilizing as insurance combined ratios normalize, (b) continued TLF expansion, and (c) lapping the Helene/Milton cat comps by Q4 FY26.

International Segment — The VAT One-Time Masks Underlying Acceleration

Reported international GP was +0.9%, but adjusted for the $6.8M VAT accrual the underlying growth was approximately +13% — fully consistent with the structural growth thesis. International insurance ASPs +9.0% (best international quarter in our coverage), international service revenue +7.7% reported / +9.4% ex-cat. International non-insurance units +9.1% — a sharp acceleration from -2.2% in Q1, suggesting Q1 weakness in U.K. dealer / Canadian fleet flow was timing-related rather than structural. International revenue +6.1% reported / +7.7% ex-cat is the best top-line print in any geography for the franchise this fiscal year.

Assessment: Ex-VAT international is performing exactly as we forecast — high-single-digit revenue growth, accelerating non-insurance unit volume, GM continuing to expand on the German consignment conversion. The one-time VAT charge will not recur. International operating margin at 23.6% is the highest in our backfilled coverage. Once Q3 FY26 prints clean of cat comps and the VAT noise, the international story will likely re-emerge in the consensus narrative — and it should.

Capital Allocation: The Buyback Resolves the Q4-Q1 Overhang

The single most important disclosure of the call, and the basis for the upgrade. Cumulative buyback through Feb 2026: >$500M / >13M shares. H1 FY26 (through Jan 31): $218.2M / 5,480,191 shares at $39.82 average. The implied math: ~$285-300M deployed between Jan 31 and Feb 19 — i.e., ~$15M/day of open-market purchases in the run-up to the print, then transitioning to a 10b5-1 plan executing through February. The pace is aggressive and the framing is structural: management is signaling that buybacks are now a permanent feature of the capital-allocation framework, not a one-off opportunistic deployment.

"During the second quarter, we began to repurchase shares of our common stock through open market purchases and have subsequently repurchased shares under a 10b5-1 plan through the month of February. Fiscal year-to-date, we have repurchased over 13 million shares for an aggregate amount of over $500 million." — Leah Stearns, CFO

Assessment: Cash declined only from $5.2B to $5.1B sequentially despite the $300M+ Q2 deployment, because free cash flow grew +58% YTD. The buyback is therefore self-funding at the current pace, and the franchise retains $5+ billion of dry powder for further acceleration if the multiple stays compressed. At ~$40 average buyback price (recent purchases likely below given the Feb sell-off), every $1B deployed buys back ~25M shares (~2.5% of outstanding) — meaningful per-share-EPS accretion that compounds over multi-quarter horizons. The Q1 FY26 cash overhang is fully resolved.

Key Topics & Management Commentary

Overall Management Tone. The call's posture was the most confidently constructive of the four-quarter arc — a notable shift from the defensive five-indicator framework of Q1. Liaw's prepared remarks dedicated airtime to TLF long-cycle data (24.2% Q4 CY 2025 vs. 15.6% in CY 2015 — a 750 bps gain over 10 years), AI deployment (1,000-plus internal engineers, multiple commercial use-cases), the durability of auction-liquidity advantages, and the cyclical-not-secular framing on consumer-coverage drift. Stearns' prepared remarks introduced the buyback disclosure without preamble — a deliberate signal that capital return is now part of the run-rate operating algorithm rather than a special event. Tone characterized by data-rich confidence, not defensiveness; this is the call where management began re-anchoring the narrative.

1. Ex-Cat U.S. Insurance Units Inflect: -7.3% → -4.8%

The single most important data point of the print. After two consecutive quarters of escalating ex-cat U.S. insurance unit declines (-2.1% Q4 → -7.3% Q1), the Q2 print showed a 240 bps improvement to -4.8%. Management explained the underlying drivers with the same framework (consumer-coverage drift, carrier-mix dynamics, TLF tailwind partially offsetting) but the data underneath has begun moving in the right direction.

"For the second quarter, our global insurance units declined 9% or 4%, excluding the effect of catastrophic units from a year ago. Our U.S. insurance units declined 10.7% for the same period or 4.8%, excluding those catastrophic units. The underlying drivers of these changes remain consistent with what we've discussed on our prior calls. First, shifts in policies in force and exposure levels across insurance carriers who themselves are experiencing differential growth rates. Softer overall claims activity driven by a consumer pullback in auto insurance coverage, all partially offset by continuing increases in total loss frequency." — Jeff Liaw, CEO

Assessment: A 240 bps quarter-over-quarter improvement in ex-cat U.S. insurance units is the cleanest signal that the cyclical-not-secular framing on consumer-coverage drift is empirically defensible. If the next two prints (Q3 and Q4 FY26) show continued sequential improvement — to, say, -2-3% by Q4 FY26 — the bottom is in, and the FY27 setup is for unit-volume recovery against a stabilized cyclical floor. This is the binding upgrade signal: not "we know unit volume returns to +5%," but "we know unit volume has stopped getting worse."

2. The Buyback as a Structural Commitment

The disclosure framing was deliberate — Stearns folded the buyback into the routine capital-structure discussion, not the strategy / capital-allocation section. The implicit message: this is the new normal, not an event. Cumulative deployment of >$500M, share count down ~13M, 10b5-1 plan active. John Healy's follow-up on whether this was the right tool prompted Liaw to confirm the full mechanism portfolio remains available (open-market, structured Dutch tender, accelerated programs) and that the pace and form can scale.

"Over the course of my tenure, and I think over the course of Copart's 40-something year history, we've used a range of different tools including open market purchases as we've recently executed all the way to more structured Dutch tenders and the like. We always evaluate the full range of tools by which to execute the strategy. ... I think what you've seen us conclude is that it made sense to buy Copart shares back as a way to distribute capital back to shareholders to distribute some of the cash flow that we had generated over the years back to shareholders. We thought this was an opportunistic time to do so, and this is the mechanism we chose to use in the moment. As you might imagine, the calculus, the various inputs into that kind of decision can change as to the magnitude or the form of the buybacks that it might take." — Jeff Liaw, CEO

Assessment: The framing — "opportunistic given the multiple" — preserves management's optionality on pace and form but explicitly confirms buybacks as the durable capital-return mechanism. The implied math: at the current ~$40 avg deployment price, every $1B = 2.5% of shares retired. If FY26 buybacks reach $1.0-1.2B (which the YTD pace implies), the structural EPS-per-share tailwind is +200-250 bps annualized. Combined with the operating-leverage tailwind on EPS (~+8-10%), the franchise is on a path to high-single-digit / low-double-digit per-share earnings growth through FY27 even at flat-to-slightly-negative unit volume. That math justifies a Hold-to-Outperform shift.

3. Total Loss Frequency Hits 24.2% — The Multi-Decade Trend Reasserts

U.S. CY Q4 2025 TLF of 24.2% (+10 bps YoY) is a +260 bps gain over the past two years (~22% baseline → 24.2%). The +10 bps YoY data point is muted by the fact that CY Q4 2024 included the Helene / Milton cat-driven TLF spike, so the comp is unusually high. Liaw used the call to introduce a 10-year long-cycle perspective: CY 2015 TLF was 15.6%; CY 2025 TLF was 23.1% — a 750 bps gain over 10 years, or ~75 bps annualized.

"In the United States, total loss frequency was 24.2% in the fourth quarter of calendar year 2025, a slight 10 basis point uptick from a year ago. The year ago period, of course, does include the effects of Hurricanes Helene and Milton. It's notable that total loss frequency has increased over that period, nonetheless. Then when you step back a bit over a multiyear horizon, the upward trajectory becomes clearer still. Total loss frequency in calendar year 2015 was 15.6% in comparison to 23.1% in calendar year 2025." — Jeff Liaw, CEO

Assessment: The 15.6% → 23.1% CY 2015-2025 TLF expansion is the most quantitative defense of the structural bull case management has put on the record. At ~75 bps annualized, TLF would reach 27% by 2030 — well within the historical trajectory. The mechanism: rising vehicle complexity (calibration, sensors, adaptive headlights, lane-keep systems) → higher repair costs → more vehicles total-lossed at the margin → more inventory to Copart. The math is durable; the cyclical noise around earned-car-years masks but does not invalidate the structural driver.

4. Auction Liquidity Defense: From 5-Indicator Framework to ASP Outperformance

The call's continuing defense of auction-liquidity differentiation centered on ASP capture: U.S. insurance ASPs +6.0% reported / +9.0% ex-cat, "yet again outpacing industry trends." The Manheim Used Vehicle Value Index has been ~roughly flat-to-modestly-positive over the same period, making the Copart ASP outperformance ~700-1000 bps wide. Liaw explicitly referenced recent account wins as having "empirical before-and-after returns data" validating the moat.

"Industry-wide vehicle values have normalized somewhat from the elevated levels we observed during supply constrained -- supply chain constrained period of 2021 and 2022 as evidenced by Manheim indices and otherwise. We are nevertheless generating record average selling prices for our U.S. insurance consignors. As we discussed at great length on our first quarter call, we attribute this performance to the scale and diversity of our global buyer network, rising international participation, enhanced data-driven merchandising and the liquidity that comes from consistently finding for each vehicle we auction its highest and best use globally. ... Our U.S. insurance ASPs for the quarter increased 6% year-over-year. Excluding the effect of the catastrophic events from a year ago, our average selling prices for the U.S. insurance sector grew by 9% year-over-year, yet again outpacing industry trends." — Jeff Liaw, CEO

Assessment: The +9% ex-cat U.S. insurance ASP print is the cleanest single data point on the moat. In an environment where used-vehicle pricing is roughly flat (Manheim) and the macro pool of insurance-funnel vehicles is shrinking (consumer-coverage drift), achieving record ASP capture per unit means Copart is extracting more value per vehicle than at any point in its history. That is incompatible with a share-loss narrative; it is consistent with a structural moat-widening narrative. The Q4 -> Q1 -> Q2 ASP trajectory (+5.7% → +8.4% → +9.0% ex-cat) is accelerating — supports the bull case.

5. AI Deployment: 1,000 Engineers and Productivity at Scale

Liaw's most expansive prepared-remarks treatment of AI to date. The franchise has ~1,000 engineers across North America, Europe, and Asia — Liaw described it as "by a healthy margin, the most robust and experienced bench of technology talent in the industry." AI use-cases now span engineering productivity, business analytics, document processing, call-for-release processes, driver dispatch, the total-loss decision tool deployed two years ago to carriers, and Liaw's "own significant personal engagement in Quad code and other such platforms."

"We have deployed artificial intelligence at scale along multiple dimensions across our enterprise, including my own significant personal engagement in Quad code and other such platforms. We've observed, not surprisingly, an exponential monthly increase in use by our own in-house team of engineers. ... Artificial intelligence is turbocharging their productivity day-to-day. We have also deployed our artificial intelligence in business analytics, document processing, our call for release processes, driver dispatch and so on and so forth. As one commercial example, 2 full years ago, we launched a total loss decision tool to the industry, which assists insurance carriers in making expedited total loss decisions with limited information, including, for example, a small sample of photos and otherwise." — Jeff Liaw, CEO

Assessment: The "exponential monthly increase" in AI tool use among Copart's 1,000-engineer team is the kind of productivity-multiplier disclosure that compounds invisibly into the operating-leverage line. Combined with the >9% YoY decline in U.S. cycle times disclosed in Q1, the AI deployment is delivering a quantifiable productivity dividend that did not exist 18 months ago. The risk Craig Kennison raised — AI disruption from new entrants — was rebutted with the moat framework (physical storage, global liquid buyer base, 50-state regulatory knowledge); a fair defense.

6. International Non-Insurance Re-accelerates to +9.1%

One of the more important under-the-radar prints. International non-insurance units grew +9.1% in Q2 after a -2.2% print in Q1. Stearns attributed Q1 weakness to U.K. dealer / Canadian fleet timing, which has now reversed. International insurance ASPs at +9.0% YoY (the highest in our coverage). The international growth engine is not just durable — it is reaccelerating.

Assessment: The international segment continues to be the most under-appreciated piece of the franchise. Operating margin at 23.6% with the VAT one-time included — call it ~24-25% on a normalized basis — and trending toward 26-28% by FY27 as the German consignment conversion completes. International is on track to be 18-20% of company gross profit by FY27 (vs. ~13-14% today) and will materially reshape the consolidated growth algorithm.

7. Land/Capacity Math: From Acquisition to Optimization

Craig Kennison's question on land capacity — a follow-up to Bottiglieri's Q1 question about the +155% growth in PP&E since 2019 — drew a clearer forward statement from CFO Stearns: capacity additions will continue but at a much more modest pace. Liaw added context referencing the original 2016 "20/20/20" initiative (20 facilities acquired / 20 expanded over 20 months) and confirmed the franchise is now in a much stronger structural position.

"Today, I think we are in an incredibly strong position relative to where we were, say, a decade or even longer ago. That has been a result of very disciplined and focused investment in the magnitude of several hundreds of millions of dollars per year. But we are still focused on where we want to be positioned 10 years from now. And that ultimately may require additional investments in land. Certainly, faster cycle times will allow us to use our land on a more efficient basis. ... we anticipate continuing to invest in our portfolio on a disciplined basis to ensure that in a decade from now, we will be well positioned as well." — Leah Stearns, CFO

Assessment: Reading between the lines: the heavy lift on land acquisition is done. Forward capex is incremental and optimization-focused. Combined with rising cycle-time efficiency (-9% YoY in Q1), the operating model is shifting from "growth via footprint expansion" to "growth via throughput density." That mathematical shift improves free cash flow conversion structurally — which in turn supports an accelerated buyback pace if management chooses.

8. Cyclical-vs-Secular: Management Sticks with Cyclical

Liaw's response to Bob Labick's opening question on what investors should watch for industry-volume recovery was the clearest cyclical-framing articulation of the four-quarter arc. Insurance-industry rate cycle, combined ratios, consumer-coverage retrenchment as a function of premium affordability — all cyclical, all eventually mean-reverting.

"There is — as you know, there's cyclicality in the auto insurance industry itself, which you'll see in the form of premium growth and contraction. You'll see in the form of combined ratios and so forth. And I think a good portion of the industry, as you know, had passed through finally with the approval of various regulatory bodies, rate increases over the course of the past few years, long after, frankly, the carriers themselves had experienced underlying cost inflation in the repair universe, labor and otherwise. So there's a lagging effect ... I think historical trends or any guide, there are ebbs and flows in that regard and many or some — some or many will begin reinvesting in growth and driving policy growth in the form of both marketing dollars as well as more competitive approaches to rates as well. ... I think consumers have felt the pain more in the past year or so, relatively speaking, and have pared back their insurance coverage as a result. I think the numbers do bear that out." — Jeff Liaw, CEO

Assessment: The cyclical framing is now empirically supported by the 240 bps ex-cat improvement in U.S. insurance units. If the framing is right, the next 2-3 quarters should continue to show sequential ex-cat improvement as the cyclical drivers unwind. The risk: if the framing is wrong and the drift is secular, the next 2-3 quarters will show continued ex-cat deterioration. The Q2 print provides the first piece of evidence supporting the cyclical interpretation; we still need 1-2 more confirmations before the debate is resolved.

9. AI Moat: Defensive Posture Confirmed

Craig Kennison probed for disruption risk in Liaw's AI commentary. The CEO's response identified the franchise's structural moats — physical storage, global buyer base, online auction platform with two-decade head start, 50-state regulatory knowledge — and characterized AI as a productivity enhancer rather than a disruption threat. Liaw also explicitly said the franchise is "always appropriately paranoid about disruption."

"I think we're always appropriately paranoid about disruption and the directions that it could come from. So we are always acutely aware of the need to disrupt ourselves and to inject the technology in all the places where we could enhance productivity first, but also deliver a better experience still to our sellers and buyers. ... I think the fundamental moats that ultimately define who we are, still are physical storage capacity for sure, a global liquid buyer base for sure, a highly recognized online auction platform, deep regulatory knowledge across 50 states, across a multitude of countries right? That is in and of itself a barrier entry as well. And then as for where those disruptive dimensions might be on the technology front, we're hell bent on making sure that we do it first." — Jeff Liaw, CEO

Assessment: The "disrupt-ourselves-first" framing is the right defensive posture given how AI-driven business models can compress traditional auction-platform margins. The 1,000-engineer bench is a credible moat that few traditional competitors can match. Long-term, the AI question is real but Copart is well-positioned relative to peers — and the next 3-5 years of operating leverage from AI-driven productivity should support the margin algorithm.

10. Price Competition vs. Returns-Based Differentiation

Bret Jordan's question on whether competitors are pricing more aggressively to win share drew the most assertive competitive-positioning statement of the call. Liaw acknowledged the industry has always been price-competitive but redirected to a "delivered economic outcomes" framing: returns first, cycle times second, fees last.

"Our industry has always been price competitive for the years that I've been here and many years before that. Probably for the entire existence of Copart, we have competed against others in the industry on the basis of price. Today, we are increasingly competing on the basis of delivered economic outcomes, which is a far better lens through which to view the Copart business. ... it's not just the X that you are paying to Copart or to your alternative providers, but it is the delivered economic outcome, which is, first and foremost, overwhelmingly so the selling price for the vehicle that you're selling at the platform. Secondarily, the cycle times, which have both direct economic consequences in the form of storage, for example, and indirect consequences in the form of policyholder satisfaction and the like. And on a tertiary, maybe further down still than that, the fees that you're paying us or to others in the industry. ... in virtually every case in which we have run the test empirically, the data bears out of that thesis that the returns that we generate dwarf any other differences that you could perceive in the full stack P&L." — Jeff Liaw, CEO

Assessment: The "in virtually every case ... the data bears out" claim is the most directly competitive statement Liaw has put on the record. Combined with the +9% ex-cat U.S. insurance ASP, the implicit message to insurance carriers shopping providers: switching to a lower-fee alternative costs you more in lost ASP than you save in fees. This is the moat-defense framing that supports the auction-liquidity thesis under increasing competitive pressure.

11. M&A Posture: Organic-Default Reaffirmed; Bar Stays High

Jash Patwa (JPM) asked whether Copart had considered more aggressive M&A in heavy equipment given Purple Wave's relative success and the industry's consolidation backdrop. Liaw's response confirmed the organic-default framework that has defined the franchise's 40-year history.

"M&A is always a lever available to companies like ours, of course, with our capitalization and capabilities. It's not our general inclination, right? We have been long-term company builders and have built Copart with the exception of one very meaningful M&A transaction some decades ago in the form of New England recovery. We've by and large, grown the business organically. That is certainly the most durable way to create value for our shareholders long term. The fastest way to grow territory is, of course, to acquire companies, we're most interested in building durable value as opposed to simply building terrain. So I think that's our approach by default, if there arise compelling M&A opportunities in heavy equipment or otherwise, we certainly would pursue them. ... in the 10 years I've been here, we've only done a tiny handful of acquisitions collectively representing a very tiny percentage of enterprise value. That hurdle will always be high, which is not to say we wouldn't do it." — Jeff Liaw, CEO

Assessment: The reaffirmation of organic-default has direct read-through to capital allocation: with M&A explicitly a low-probability event over a multi-year horizon, the cash balance accrues for either buybacks or special tenders rather than acquisitions. This further validates the buyback-as-structural-mechanism framing and supports continued buyback acceleration as cash builds.

Analyst Q&A Highlights

What Indicators Mark the Industry-Volume Inflection

The opening question of Q&A — Bob Labick (CJS) — was the most analytically useful framing of the broader recovery debate. Setting aside total-loss frequency, what are the cyclical drivers investors should watch for to anticipate when industry-wide unit volume returns to growth? Liaw's response anchored on the insurance-industry cycle: combined ratios, premium growth, carrier marketing intensity, and the consumer-affordability transmission.

Q: "What are the kind of — what are the things you guys are watching to see changes that will change this trend line and get the industry volumes back to growth going forward? I know, obviously, total loss frequency will impact that as well. But excluding total loss frequency, what are the other kind of macro factors that we can watch and you're watching to get industry volumes back to growth?"
— Bob Labick, CJS Securities

A: "There is — as you know, there's cyclicality in the auto insurance industry itself, which you'll see in the form of premium growth and contraction. You'll see in the form of combined ratios and so forth. And I think a good portion of the industry, as you know, had passed through finally with the approval of various regulatory bodies, rate increases over the course of the past few years, long after, frankly, the carriers themselves had experienced underlying cost inflation in the repair universe, labor and otherwise. So there's a lagging effect where it took them a while ... so today, they have now far healthier income statements, but also compromised growth as a result. I think historical trends or any guide, there are ebbs and flows in that regard and many or some — some or many will begin reinvesting in growth and driving policy growth in the form of both marketing dollars as well as more competitive approaches to rates as well. ... I think consumers have felt the pain more in the past year or so, relatively speaking, and have pared back their insurance coverage as a result. I think the numbers do bear that out."
— Jeff Liaw, CEO

Assessment: The chain — combined ratios normalize → carrier marketing-and-rate competition → consumer affordability improves → coverage uptake rises → claims funnel rises → Copart units recover — has a cumulative ~9-15 month lag. The earliest plausible inflection in Copart's reported unit volume on this chain: 2H FY26 (calendar 1H 2026), which lines up exactly with our base case. Bob asking the question and Liaw providing the chain answer together suggest the buy-side / sell-side dialogue has shifted toward recovery-timing rather than continued-decline modeling. That's a positioning shift consistent with our upgrade thesis.

Capital Allocation: Tool Selection on the Buyback

The most consequential exchange of the call. John Healy (Northcoast), who had asked the capital-return question explicitly in both Q4 FY25 and Q1 FY26 to dismissive responses, used this call to probe on the form of the now-active buyback program. Liaw confirmed open-market purchases as the current tool but explicitly preserved optionality on structured Dutch tenders and accelerated programs.

Q: "Obviously, you're being pretty direct with the repurchase visibility now. But is this the right tool for you guys? Do you see yourselves just using open market purchases? Or do you look to kind of evaluate maybe something more formal or conceptual in terms of accelerated program or something like that? Or do you think this is just the right approach for right now?"
— John Healy, Northcoast Research

A: "Over the course of my tenure, and I think over the course of Copart's 40-something year history, we've used a range of different tools including open market purchases as we've recently executed all the way to more structured Dutch tenders and the like. We always evaluate the full range of tools by which to execute the strategy. I think on the margin, I think that's ultimately more rounding error than it's not. ... we thought this was an opportunistic time to do so, and this is the mechanism we chose to use in the moment. As you might imagine, the calculus, the various inputs into that kind of decision can change as to the magnitude or the form of the buybacks that it might take. I think it's difficult to predict in the vacuum what that means as we look forward."
— Jeff Liaw, CEO

Assessment: The "magnitude or form ... can change" language is the most flexibility-preserving framing Liaw could offer while still confirming an ongoing program. The implied flexibility — that a structured Dutch tender or accelerated program remains available if the stock price moves further or if a faster deployment is desired — is meaningful optionality. A $1-2B Dutch tender at the current ~$32 price would retire 3-6% of shares in a single transaction. The buyback machinery is more formidable than the disclosure suggests; the disclosure is calibrated to under-promise.

Long-Cycle Accident Frequency and the TAM Trajectory

John Healy's follow-up on the structural growth question — what does this business really grow at over a 3-5 year horizon, abstracting from carrier-specific noise — produced the most extensive long-cycle framing of the call. Liaw walked through accident-frequency decline as a multi-decade safety-technology phenomenon, the historical exception (smartphone-driven 2013-2015 blip), the offsetting structural TLF expansion, and the slow turnover dynamics of the 300M U.S. vehicle park.

Q: "Just any updated thoughts about ADAS view of kind of the algorithm that investors might be able to use to think about the nuances of growth. Obviously, the volume numbers are down big, but there's some explainable reasons in terms of policies in force that you noted. But I was just hoping we can try to get some comfort with thinking about that overarching volume number for the industry, put aside whatever you or IAA are doing. Just what does this business really grow, do you think in the next 3 to 5 years?"
— John Healy, Northcoast Research

A: "Accident frequency, generally speaking, declines year-over-year. That has always been true because cars are designed better and they're safer over the years. ... safety technologies are arriving in the form of forward autonomous braking modules, lane departure warning, sensors, rear cameras and so on and so forth. So accident frequency has declined always, plus or minus year-over-year. ... The reason it historically has happened very gradually is because the relevant population of vehicles is in the hundreds of millions in the U.S. and the number of new vehicles we'll ship in a given year, depending on the state of the economy, is 15 million or 14 million or 18 million. ... The vehicle park of 300 million or so in the U.S. can turn over only so fast. So the changes in accident frequency end up being gradual. And the tailwind in the business is that even if the number of cars that are in accidents decline, the number of cars that are totaled in absolute terms still grows because there are more — enough total loss frequency increases to more than offset the decrease in accident frequency. Based on what we know now, I don't think that calculus changes. ... There is an installed base of vehicles that will collide. There is an awkward transitional period also as many of those cars don't have the newest and best technology while cars are on the road that do. The cars that do are often driven by drivers who are still more distracted than they otherwise would be."
— Jeff Liaw, CEO

Assessment: The "risk homeostasis" mention — drivers compensating for safer cars by accepting more risk in their driving behavior — is an unusually nuanced framing of long-cycle ADAS adoption that the buyside has not yet fully integrated into models. The Liaw math: even if accident frequency falls by 1-2% annually (consistent with the multi-decade trajectory), TLF expansion of +75 bps annually (from 23.1% in CY25 toward 27% by CY30) more than offsets, leaving total-loss-vehicle volume positive on a long-cycle basis. The framework is internally consistent and remains the durable structural anchor of the franchise.

The Differential Unit-Growth-Rate Question

Bret Jordan (Jefferies) pressed on whether the recent unit declines reflected price competition from a direct competitor (the unnamed "other player") rather than the broader cyclical drivers Liaw consistently invokes. Liaw redirected to the "delivered economic outcomes" framework and the empirical data showing Copart's auction returns dwarf the fee-cost difference vs. alternatives.

Q: "I've a question about market share dynamics. Do you think it's becoming more price competitive as the other player in the space doing, I guess, either rebating or discounting or pricing delta to you that would explain what seems to be a differential in unit growth. Obviously, you've got the title transfer product and the cycle times and the foreign buyer base that would suggest that Copart might be a better outcome. But I guess how do we think about the differences that we're seeing in units recently?"
— Bret Jordan, Jefferies

A: "The unit growth phenomenon, I think, is described — is explained in part by just differential growth rates in the insurance industry itself, right, which is to say if we didn't win any accounts from others in the industry and they didn't win any from us. There still is a delta in the growth rate of our underlying customers themselves that can explain a 'market share shift,' right, without literally losing one account one way or the other. That said, I think your point — your second point is the important one, which is that our industry has always been price competitive for the years that I've been here and many years before that. ... Today, we are increasingly competing on the basis of delivered economic outcomes, which is a far better lens through which to view the Copart business. ... It's our job to convey that message. It's a complex nuanced one. We have to make sure we have the right audience for it and the data behind it. But I would say, in virtually every case in which we have run the test empirically, the data bears out of that thesis that the returns that we generate dwarf any other differences that you could perceive in the full stack P&L."
— Jeff Liaw, CEO

Assessment: The "differential growth rates among underlying customers" framing is Liaw's most explicit acknowledgment that carrier-mix-shift (toward share gainers like Progressive that may have lower Copart-channel intensity) is a real but bounded headwind. It's not Copart losing accounts; it's Copart's accounts losing share. The framing is internally consistent — and the operationally relevant response is the +9% ex-cat ASP and continued auction-liquidity moat work that defends share-of-claim within each carrier.

Uninsured / Underinsured Vehicle Capture via Cash-For-Cars

Jash Patwa (JPM) returned to the consumer-coverage drift question from a different angle: as Copart de-emphasizes low-value direct-buy units, does this compound the headwind on overall volume by reducing capture from the consumer-direct channel? CFO Stearns clarified that the de-emphasized units are sub-$1,000 ACV vehicles — true junk units — while the consumer-direct path for higher-value uninsured-totaled vehicles continues to flow into Cash-for-Cars.

Q: "Just wanted to start with a question on the headwind from rising mix of uninsured customers. Jeff, as you've noted previously, these vehicles are still getting into accidents, but maybe flowing through alternate channels. With Copart having deemphasized the low-value units from some of these channels, has this led to an additional pressure on Copart's overall volume growth relative to the broader salvage industry, including the noninsurance channel?"
— Jash Patwa, JPMorgan

A: "I don't think so. Most of the lower value units are units that are less than $1,000 in pre-accident value. So they are very old nondrivable what the industry would consider junk units. I think the units that we are seeing flow through on the uninsured or underinsured side, are likely ending up in impound yards. They're likely ending up retained with the driver, but they then need to find a way to either get it repaired or dispose of the vehicle. So ultimately, some of those vehicles end up at our cash for cars business. Some of them may end up being auctioned or sold through an impound yard. So there are other avenues in which those vehicles could be disposed of. It just so happens that it's a highly fragmented market, given that it's the consumer's decision to determine where that ultimate vehicle goes if it's not going through the insurance channel."
— Leah Stearns, CFO

Assessment: The clarification that the deprioritized units are sub-$1,000 ACV junk vehicles closes an analytical loop. The direct-buy reroute and the consumer-coverage drift are not stacking headwinds on the same volume — they affect different segments of the addressable funnel. The structural read: lost institutional-channel volume from coverage drift is partially captured via Cash-for-Cars at lower fee economics; the direct-buy reroute is independent of that, optimizing low-ASP processing economics. Both moves are individually correct strategic decisions.

Purple Wave and the M&A Bar

Jash Patwa's follow-up on the Purple Wave investment thesis prompted the most candid retrospective on the deal that we have heard from Liaw. The tariff-driven paralysis in heavy equipment was unanticipated; Purple Wave's growth has nevertheless outpaced industry growth. The broader M&A bar remains very high, with only a "tiny handful of acquisitions" in Liaw's decade-long tenure.

Q: "Just appreciate your perspective on the heavy equipment expansion. How has this initiative performed relative to your internal expectations a couple of years ago when Purple Wave was integrated? While the industry cycle has been challenging, curious like what areas do you see as a room for improvement? And given the significant consolidation opportunity in the sector, what has kept Copart on the sidelines from pursuing more M&A activity over the past couple of years?"
— Jash Patwa, JPMorgan

A: "At the time we made the investment in our Purple Wave platform, I think we had not — we had not fully appreciated the disruption that the tariff complex would introduce into the industry and the uncertainty that it would inject into the industry for heavy equipment, right? It has caused something of a medium-term paralysis as folks didn't know if they should be selling because prices might go up or they should be buying because prices might go down. ... We have been long-term company builders and have built Copart with the exception of one very meaningful M&A transaction some decades ago in the form of New England recovery. We've by and large, grown the business organically. That is certainly the most durable way to create value for our shareholders long term. ... in the 10 years I've been here, we've only done a tiny handful of acquisitions collectively representing a very tiny percentage of enterprise value. That hurdle will always be high, which is not to say we wouldn't do it. But I just want you to understand the cultural bias, which is to grow and to grow organically."
— Jeff Liaw, CEO

Assessment: The "cultural bias to grow organically" framing reinforces that the cash balance is not earmarked for transformative M&A. Combined with the active buyback, the implication is clear: forward capital allocation will be biased toward buybacks. The Purple Wave retrospective — acknowledging the tariff-environment headwind was not modeled — is a useful candor moment that supports the broader thesis that management is willing to be self-critical when models are wrong.

What They're NOT Saying

1. No forward buyback authorization size or pace commitment: Despite >$500M deployed and an active 10b5-1 plan, management explicitly preserved optionality on magnitude and form. A forward-looking authorization disclosure ($2B / $3B / X% of FCF annually) would strengthen the structural-commitment framing and likely produce a multiple expansion.
2. No quantification of the Q2 ex-cat improvement as a percentage of consumer-coverage drift recovery: The 240 bps improvement from -7.3% Q1 to -4.8% Q2 is encouraging but unquantified by source. Is it earned-car-years recovering? Carrier-mix stabilizing? Cyclical cycle bottoming? The mechanism would matter for forward modeling.
3. No specific commentary on Q3 FY26 cat-comp dynamics: Q3 FY25 was relatively quiet (no major cat events), so Q3 FY26 reported and ex-cat U.S. insurance units should converge — a clean read. Management did not signal this explicitly.
4. No update on Title Express monetization economics: Title Express was mentioned multiple times as a productivity contributor (cycle-time compression, fee revenue uplift) but the revenue contribution and growth rate remain undisclosed.
5. No discussion of share-of-Progressive-claim-flow dynamics: Liaw acknowledged differential carrier growth rates as a partial explanation for unit-volume softness but did not address whether Copart is gaining or losing share within the share-gaining carriers specifically.
6. No commentary on FCF deployment beyond buybacks: With FCF +58% YTD and minimal capex acceleration, the franchise is generating cash faster than the buyback consumes it. Special tender? Dividend initiation? Accelerated facility consolidation? None addressed.
7. No segment-level Purple Wave profitability disclosure: Purple Wave GTV +17% TTM is well-disclosed, but the segment's contribution to consolidated margin or operating income remains a black box.

Market Reaction

• Pre-print setup: CPRT entered Feb 19 close at ~$36, down ~35-40% YTD against a roughly flat S&P 500. Sell-side stance was bifurcated with PTs in the $34-$42 range; JPM had cut to $34 in Nov and held there.
• Options-implied move: Approximately 6-7%, slightly elevated vs. the trailing-8 average — reflecting setup uncertainty on the back of weak monthly insurance-industry data through January.
• After-hours (Feb 19 PM): Stock initially traded down ~3-4% on the headline EPS / revenue double-miss. The buyback disclosure provided a brief upside before the headline trajectory reasserted.
• Regular session (Feb 20): Stock closed down ~10.94%, the worst single-session post-earnings move in our backfilled CPRT coverage. Touched a new 12-month low. Volume well above 2-3x the 30-day average — capitulation-style flow.
• Post-print sell-side resets: Modest — most fundamental analysts had cut PTs in November, leaving room for the headline disappointment without further PT revisions. JPM held at $34; Barclays trimmed marginally to ~$30; sell-side weighted-average PT ~$36-38 (broadly unchanged from pre-print).
• Peer cross-read: RBA traded down ~-2-3% on cross-read; insurance carriers (PGR, ALL, TRV) modestly weaker but unaffected; auto parts (AAP, AZO, GPC) flat.

The Capitulation Was the Setup. The combination of (a) a 12-month low at the session close, (b) blowout volume, (c) muted PT revisions because shops had already cut in November, and (d) a fundamental print that was structurally better than the headlines all align with a capitulation-style buy-side flow event. Sell-side hadn't anchored further down; the buy-side delivered the rest of the de-rating in a single session. Historically, these setups in compounder stocks are followed by 6-12 month outperformance once the underlying earnings algorithm reasserts.

Why the Buyback Didn't Save the Print. The disclosure framing was deliberately understated — Stearns folded the buyback into the routine capital-structure paragraph rather than featuring it as a strategic shift. Combined with the headline double-miss, the buyback narrative was sub-headlines for most institutional readers. The market read: "they bought $500M back; that's good; the print is bad; we're selling." Over the next 6-8 weeks, as the buyback continues to execute via 10b5-1 and the EPS-per-share accretion mechanically lands, the narrative should re-rate.

Underlying Capitulation Math. At ~$32 post-print (the apparent Feb 20 close), CPRT trades at approximately 19x our FY27E EPS of $1.70-1.80 and ~22x our FY26E EPS of $1.45-1.50. For a franchise with a $5B+ cash balance executing a $1-2B annual buyback, a long-cycle TLF tailwind, mid-teens international growth, and demonstrated operating-leverage expansion, the multiple is materially below the franchise's 5-year median of ~30x. The fair-value framework: at a more normalized 24-25x FY27E, the stock trades to $42-45 — implied upside of ~30-40% from current levels. Risk-reward inverted.

Street Perspective

Debate: Is the Capitulation Sell-Off the Bottom?

Bull view: The combination of -11% post-print, a 12-month low, blowout volume, and sell-side PTs that have already been cut (JPM $34) is the classic capitulation signature. Forward catalysts are now stacked positively: (a) buyback continues at $80-100M/month pace, mechanically retiring 2-3% of shares annually; (b) Q3 FY26 print (May 2026) lapses the unfavorable cat comps, allowing ex-cat to become reported; (c) any Q3 print showing further ex-cat unit improvement (e.g., -2 to -4%) confirms the cyclical-bottom thesis. At ~$32 the stock is priced for the worst — small upside in the base case, meaningful upside if any catalyst breaks favorably.

Bear view: The capitulation may be premature. Three risks remain: (a) Q3 FY26 ex-cat unit print could disappoint (continued -5%+ would harden the secular interpretation); (b) the buyback could decelerate if management views the multiple as having recovered; (c) FY27 margin expansion may compress as the easy mix-shift drivers exhaust. A move to high-teens P/E ($28-30) is possible if any of these plays out.

Our take: The bear case is mathematically possible but increasingly improbable. The Q1 → Q2 ex-cat improvement (240 bps) is the leading indicator that the cyclical drivers are doing what they should — and the next 2 quarters of comp lapping mechanically improves the reported numbers. The buyback is structural, not opportunistic; management's "magnitude / form can change" framing suggests room for acceleration, not deceleration. We see 30-40% upside to ~$42-45 over a 12-month horizon vs. ~10-15% downside to ~$28-30 in a bear scenario — a 3:1 risk-reward.

Debate: Is the Buyback a New Algorithm or an Opportunistic Window?

Bull view: The structural framing — Stearns folding the buyback disclosure into routine capital-structure commentary, the 10b5-1 plan structure, the >$500M cumulative deployment — all signal a multi-year program rather than a single tactical window. Management's "we treat capital as precious" framework from Q1 has now translated into action. The FY26 buyback pace implies $1-1.5B annualized; combined with $5B+ existing cash, the franchise has 3-5 years of buyback capacity at current rates without external funding.

Bear view: Liaw was explicit in calling the current execution "opportunistic" and explicitly preserved optionality on magnitude and form. If the stock recovers materially (e.g., back above $45), the buyback could decelerate. The absence of a formal authorization size or a percent-of-FCF commitment means investors are placing trust in management's continued willingness to deploy at attractive prices — and management has not committed to that as a discipline.

Our take: The bull case is the more defensible interpretation of the data. The +58% YTD FCF growth is structurally important — the franchise is now generating cash faster than the current buyback consumes it, so accelerating the buyback is the easiest path to maintain the current cash buffer. We model FY26 buyback at $1.2-1.5B and FY27 at $1.5-2.0B as the FCF compounding continues. The forward EPS-per-share tailwind is ~+200-250 bps annualized — a structural addition to the operating-leverage thesis.

Debate: How Much Are We Reading Into the 240 bps Ex-Cat Improvement?

Bull view: The Q1 → Q2 ex-cat improvement (from -7.3% to -4.8%) is the first concrete evidence supporting the cyclical-not-secular framing on consumer-coverage drift. If Q3 FY26 confirms continued improvement (to -2 to -4%), the bottom is in. Combined with the long-cycle TLF tailwind (24.2% Q4 CY25 vs. 15.6% CY15), the path back to positive unit growth runs through Q1-Q2 FY27.

Bear view: One quarter does not constitute a trend, and the ex-cat improvement could equally reflect cat-comp timing rather than underlying recovery. The headline -10.7% U.S. insurance unit print is the worst in the cycle, and any view of "improvement" should be triangulated against multiple-quarter sequential evidence. Drawing conclusions from a single-quarter inflection in a multi-quarter declining trend is premature.

Our take: The bear caution is appropriate but does not invalidate the bull read. A 240 bps single-quarter sequential improvement is statistically meaningful and not within the typical noise band for quarterly insurance unit volumes. We would want to see Q3 FY26 confirm (-3 to -5% ex-cat is the range that supports the cyclical-bottoming thesis) before declaring victory, but the directional signal is the right one. Combined with the buyback and margin print, the print as a whole is sufficient to upgrade — we don't need Q3 confirmation to act.

Model Update Needed

Valuation impact: Fair-value range $42-48 vs. ~$32 post-print, implying 30-50% upside. The valuation framework: 24-25x FY27E EPS of $1.75-1.80 = $42-45 base case. Bull case: 26-28x FY27E with $2.00+ EPS on margin reacceleration + buyback compounding = $52-56. Bear case: 18-20x FY27E with $1.50-1.60 EPS on unit-decline persistence = $27-32 (broadly current). Skewed reward, asymmetric upside.

Thesis Scorecard Post-Earnings

Overall: Thesis trajectory has materially improved. Three of four prior Q1 watch items resolved favorably: (a) buyback active, (b) U.S. ex-cat units inflected, (c) multiple compressed to attractive levels. The remaining open question — Progressive share dynamics — is a multi-quarter watch item but does not bind near-term upside. Conviction on direction is high; multiple expansion driven by either continued ex-cat improvement or accelerated buyback deployment.

Action: Upgrading to Outperform from Hold. The combination of (a) headline capitulation creating attractive entry, (b) underlying ex-cat unit improvement, (c) active buyback at $500M+ cumulative, and (d) intact margin algorithm produces a 3:1 risk-reward over a 12-month horizon. Fair value framework: $42-48 base case (30-50% upside). Move to Hold if Q3 FY26 shows ex-cat U.S. insurance units re-deteriorating below -6% or the buyback pace decelerates materially. Move to Underperform requires both an ex-cat unit decline below -8% AND a buyback halt — a low-probability outcome given the structural framework now in place.