Many Moving Parts

LKQ Corp (LKQ) is in the salvage business. The company purchases junk cars, strips the car of good parts, refurbishes these parts, then packages and sells these parts to auto parts stores, or direct to consumers through its own auto parts stores.

I used to own LKQ, and continued to hang with it a while as the stock basically did nothing. Then I sold it in March of this year around $25 and shook my head as it then went past $30.

The company is a good one, expanding by purchasing salvage yards as well as auto parts chains, and I would like to buy the stock again if the price was right. LKQ growing rapidly overseas with 28% of revenue coming outside North America, mainly through acquisitions in Europe. But International growth also leads to foreign exchange issues, both in Europe and Canada as well. Oh, another issue LKQ faces is commodity prices. If scrap metal prices are low then this means less revenue from demolished cars. On the plus side, the company is benefiting from lower oil prices which allow people to drive more miles, thus needing more replacement parts.

One Year Chart

Here in the one-year chart you can see the stock made its move higher as profit growth was in the single digits. Investors got in ahead of the good news (and of course the stock went up after I sold).

Revenue grew 8% last qtr, as profits increased 15%. The company beat the 36 cent estimate by 3 cents, and Annual Profit Estimates stayed around the same.

Fair Value

At 21x earnings I feel LKQ is a bit high. I used to believe LKQ could sell for 24x earnings, then sat with it for 14 months as it did nothing (looking back I bought the stock for $27 and threw in the towel at $24). Now I feel 18x earnings is the right price.

Sharek’s Take

LKQ is a complicated company to own, as there are many moving parts to analyze such as scrap metal prices, gross profit margins, foreign exchange, acquisitions. But in the end if you look at the ten-year chart you see a stock that’s grown 23% a year in the last decade as profits climbed 24% a year. The current estimated long-term growth rate is 25% a year, but the company is growing in the mid-teens right now due to F/X and commodity prices. Still, mid-teens or greater is fine in my book. Now the only issue is valuation. I feel $30 is too high to buy and if the stock dips back down below $25 I will be looking to buy back in.