LKQ Company Stock: Buy it for $50 and get a business integration bonus

scrapped vehicle

Owen Price

investment thesis

LKQ Corporation (NASDAQ Stock Symbol: LKQ) will see higher share prices due to lower costs from business consolidation and increased demand as more cars hit the road each year and the average age increases.The company assists collision and machinery Repair shops, new and used car dealers, and retail customers can complete repairs faster, increasing productivity at a lower cost.

LKQ Company

LKQ offers its customers an extensive line of OEM recycled and non-OEM aftermarket parts, replacement systems, components, equipment and services to repair and trim cars, trucks, recreational vehicles and performance vehicles. Originally established in 1998 as a consolidator of the US automotive salvage business, its scope has expanded significantly to include the distribution of new mechanical and crash parts, specialty automotive equipment, and remanufactured and salvaged parts. It maintains its auto salvage business and has more than 70 LKQ parts recycling depots.

Globally, LKQ has approximately 1,700 facilities. The company’s business covers the United States, Canada, the United Kingdom, Germany, Belgium, the Netherlands, Luxembourg, Italy, the Czech Republic, Austria, Poland, Slovakia, Taiwan and other European countries. LKQ Corporation is headquartered in Chicago, IL.

LKQ is the largest car recycler in the world. They now recycle over 800,000 cars a year. The company is undeniably environmentally friendly, as it removes all potentially dangerous fluids from each vehicle and resells the vehicle’s parts, keeping them out of landfills and reducing the possible impact of making new parts.

June Investor Day Presentation

LKQ’s strength lies in its ability to source and reclaim parts, catalog and handle inventory management. Their relationships with insurance companies, customers and B2B e-commerce give them a competitive advantage.

June Investor Day Presentation

LKQ’s EBITDA comes from four segments. North America accounted for 44.6%, while Europe accounted for 34.2%, followed by professional accounted for 12.3%, and self-service accounted for 8.9%, where customers can choose parts.

June Investor Day Presentation

The North American market is a leading supplier of aftermarket and recycled collision repair parts. They also remanufacture engines, transmissions, rear axles, turbochargers and refurbished hybrid batteries.

June Investor Day Presentation

The company has built scale-driven cost advantages into its business. Customers value LKQ’s consistently wide parts availability and fast delivery. LKQ helps customers complete repairs faster and increase productivity at a lower cost. By some estimates, LKQ’s recycled parts completion rate is about 75%, compared with about 25% for competitors.

LKQ’ uses its fleet of company-owned trucks to move inventory between warehouses. This enables LKQ to cost-effectively reduce order lead times for customers.

LKQ would benefit if the economy slows, as consumers typically hold off on new car purchases. Owners will use non-OEM and recycled parts to keep their vehicles on the road longer at a lower cost.

The company sources recycled vehicles from auto auctions. Bidders at LKQ utilize in-house developed software to cross-check current inventory levels and average selling prices to determine the best vehicle bids. This prevents the company from overspending on vehicles, resulting in higher profitability than its smaller peers.

Historically, the company has increased its capabilities and footprint through acquisitions, but that has changed over the past few years. LKQ has shifted its focus to integrating businesses and improving its cost structure, and will focus on making smaller acquisitions rather than larger deals.

LKQ has 46,000 employees and annual sales of $12.9B. They are 97.9% held by institutions with a short interest of 2.0%. Their return on equity was 22.6%, and their return on invested capital was 14.0%. The yield on free cash flow per share was 4.6%, and the yield on buybacks per share was 8.1%. Their Piotroski F score of 5 suggests some strength. Their price-to-book ratio is 2.8.

Third Quarter Quarterly Results and Full Year Outlook

LKQ announced third-quarter revenue of $3.1B in its press release. LKQ reported third-quarter EPS of $0.97, slightly above consensus estimates. The North American wholesale business performed better than expected, with organic parts and service revenue growing 4.8% annually. But that wasn’t enough to offset declines from exchange rates and divestitures, which left revenue 5.9% lower than in the third quarter of last year.

45% of total Q3 revenue came from recycled parts, 17% from new aftermarket parts, 15% from specialty, which includes marine, powersports and e-bikes, 14% from European business, 7% from other, and 2% Pick your parts from self-service.

Q3 Earnings Report

Supply chain remains an issue and management explained currency headwinds in Europe. LKQ sales fell to $3.1 billion in the third quarter, down 5.9% year-over-year. Revenue was primarily impacted by exchange rates (690 basis point impact) and divestitures (210 basis point headwind). On a constant currency basis, company sales grew 1.0% annually.

LKQ said aftermarket and recycling demand remained strong given the aging of vehicles and limited sales of new vehicles. LKQ’s EBITDA margin by segment shows 18.3% in North America, 10.2% in Europe and 12.0% in specialty in 2021.

Management lowered its 2022 adjusted EPS forecast. At the midpoint, the guide was lowered from $3.95 to $3.90. LKQ expects scrap and metal prices ($0.04), exchange rates ($0.03) and taxes ($0.03) to have a downside impact on adjusted EPS by the end of 2022. Better operating performance and share buybacks will partially offset these items.

Balance Sheet Improvement and Share Buybacks

LKQ intends to sell several small non-core businesses to simplify its operating model and improve profit margins. Proceeds can be used to reduce debt and returned to shareholders through share repurchases and dividend payments.

LKQ’s variable cost structure allows them to adjust as the current environment changes. Its $1 billion cost-cutting plan will help. Free cash flow is expected to be around $1 billion in 2022, down slightly from $1.07 billion in 2021 and $1.27 billion in 2020. Interest expense savings from debt repayments and share buybacks will boost earnings per share.

June Investor Day Presentation

Management is also committed to repurchasing shares, as evidenced by the current share repurchase program. LKQ repurchased $891 million in stock in the first nine months of 2022, $877 million in 2021, $117 million in 2020 and $292 million in 2019. On October 25, the company authorized a $1 billion increase to its share repurchase program.

June Investor Day Presentation

Q3 Earnings Report

Q3 Earnings Report

Q3 Earnings Report

Good technical entry point

As of November 30, LKQ’s closing price was $54.33. I added green Fibonacci lines, using LKQ for the past five years highs and lows. It is worth noting how the market pauses or bounces off of these Fibonacci lines. They may be one of the clues to judge the direction of the stock price. LKQ is above the 76.4% Fibonacci retracement level but could head lower. I think patient investors will be able to buy LKQ at or near $50 if they wait.

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Schwab Street Smart Edge

The three most accurate analysts have an average one-year price target of $66.17, which, if correct, suggests a potential upside of 21.7% from the Nov. 30 closing price of $54.33. They all have Buy ratings. Analysts are just one of my indicators, they’re not perfect, but they’re usually within estimates, or at least headed in the right direction. They usually look a little bullish, so I suspect prices could end up being lower than their one-year targets just to play it safe.

Trends in EPS, P/E and Operating Margins

The black line is the stock price of LKQ in the past two decades. Looking at the numbers chart below the chart, you can see that LKQ’s revenue was $1.75 in 2019, $2.10 in 2020, $3.68 in 2021, and is expected to earn $4.02 in 2022 and $3.65 in 2023.

LKQ’s current P/E ratio is 13, but its average P/E ratio over the past decade is 20. I don’t think the P/E ratio will go back to 20 anytime soon. If LKQ earns $3.65 in 2023, the stock could trade at $55.11 if the market specifies a P/E ratio of 15.1.

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LKQ’s operating margin has improved over the past few years.

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sell covered calls

My answer to uncertainty is to sell covered calls on LKQ six months from now. LKQ closed at $54.33 on November 30, and I think patient investors will be able to buy LKQ at or near $50.00 in the coming weeks and months. The May $50.00 covered call could then be sold. A covered call requires the purchase of 100 shares of stock.

take away

LKQ will see a higher share price due to cost reductions from business integration and increased demand as more cars hit the road each year and the average age increases. Wait and buy LKQ as it approaches $50.00, then sell the May $50 covered call to enhance returns and reduce risk while collecting dividends.

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