Analysts' Choice: Shift Into High Gear With LKQ

5/16/2016


  Recent Price
$33
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
22
  Shares (millions)
308
  Long-Term Debt As % Of Capital
46%
  52-Week Price Range
$34.26 - $23.95

At first glance, LKQ ($33; LKQ) looks a lot like Focus List Buy Lear ($115; LEA), an auto-parts maker. However, while the two swim in the same pool, they use quite different strokes.

Lear makes parts used by automakers, while LKQ distributes parts — primarily aftermarket, recycled, remanufactured, or refurbished — on a wholesale basis, mostly to repair shops. LKQ calls itself the largest U.S. distributor of "alternative" collision-repair parts, which accounted for more than 35% of repair activity last year.

Over the last three years, LKQ has managed annualized growth of 20% in sales, 18% in per-share earnings, and 32% in operating cash flow. Analysts expect growth to continue, with the consensus calling for sales to rise 27% and earnings 28% this year, followed by growth of 13% and 16%, respectively, in 2017. Yet LKQ trades at 18 times expected 2016 earnings, 11% below the median for distributors in the S&P 1500 Index.

In the April 25 issue, we initiated LKQ as a Buy and a Long-Term Buy.

Growth drivers

Insurance companies have long sought cheaper substitutes for original equipment manufacturer (OEM) parts. Insurers pay for most collision repairs, making them key demand drivers for LKQ, a preferred provider for a number of underwriters. In the U.S., LKQ has typically sold parts at a 20% to 50% discount to OEMs.

The quest to limit costs never truly ends. Cost-consciousness, combined with the trend of owners holding onto their cars longer, drives a massive — and still growing — market for LKQ. According to researcher IHS Automotive, the aftermarket sweet spot, or the age range of vehicles most likely to receive aftermarket parts, has both widened and matured in recent years. IHS sees the number of vehicles 12 or more years old (what it considers the new sweet spot) rising 15% from 2015 to 2020, with vehicles 16 years or older jumping 33% to 76 million. 

Since forming in 1998 as a combination of several recycled-parts businesses, LKQ has expanded its network via more than 220 acquisitions. In December, the company agreed to purchase Rhiag-Inter Auto Parts Italia, a European distributor of aftermarket parts. The deal should close by July, and LKQ expects to continue its acquisitive ways, particularly in Europe. Acquisitions have accounted for more than half of LKQ's growth in recent years.

Broad reach

LKQ generates 58% of its revenue and 64% of EBITDA (earnings before interest, taxes, depreciation, and amortization) from its core business in North America, with the rest coming from Europe (28%, 23%) and the specialty unit (15%, 12%), which sells parts for specialty vehicles, as well as towing and performance equipment.

LKQ doesn't make its aftermarket parts, instead buying them from suppliers. Last year, the company also bought 287,000 salvaged vehicles to harvest recycled parts. LKQ operates plants to refurbish or remanufacture engines, wheels, bumpers, and other parts.

Obtain an annual report for LKQ Corp. at 500 W. Madison St., Suite 2800, Chicago, IL 60661, (312) 621-1950, www.lkqcorp.com.

LKQ
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
0.42
vs.
0.38
8%
32.12
-
23.95
22 - 17
Dec '15
0.32
vs.
0.27
4%
30.50
-
27.08
22 - 20
Sep '15
0.34
vs.
0.31
6%
32.25
-
26.67
24 - 20
Jun '15
0.39
vs.
0.35
8%
30.82
-
24.92
24 - 19
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
7.19
1.42
0.00
32.25
-
22.90
23 - 16
2014
6.74
1.27
0.00
32.90
-
24.46
26 - 19
2013
5.06
1.05
0.00
34.32
-
20.09
33 - 19
2012
4.12
0.87
0.00
22.28
-
14.63
26 - 17
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
80
51
97
45
99
83

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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