LKQ Corporation (NASDAQ: LKQ) is likely to see its share price rise as demand rises due to cost savings from business consolidation and as more cars are on the road each year and their average age is increasing.Company Help Collisions and Machines Repair shops, new and used car dealerships, and retail customers can complete repairs faster, increase productivity, and reduce costs.
LKQ Co., Ltd.
LKQ provides customers with a wide range of OEM recycle and non-OEM aftermarket parts, replacement systems, components, equipment and services to repair and accessorize automobiles, trucks, recreational and performance vehicles. Since its inception in 1998 as a consolidator of automotive salvage operations in the United States, the scope has expanded significantly to include the sale of new mechanical and crash parts, specialty automotive equipment, remanufactured and recycled parts. Maintains a car salvage business and owns over 70 of his LKQ pick-up junkyards.
LKQ maintains approximately 1,700 facilities worldwide. The company operates in the United States, Canada, United Kingdom, Germany, Belgium, Netherlands, Luxembourg, Italy, Czech Republic, Austria, Poland, Slovakia, Taiwan, and other European countries. LKQ Corporation is headquartered in Chicago, Illinois.
LKQ is the world’s largest auto recycler. We currently recycle more than 800,000 vehicles annually. This company is definitely environmentally friendly. By removing all potentially hazardous fluids from each car and reselling vehicle parts, we keep them out of landfills and reduce the impact of creating new parts.
LKQ’s strength lies in its processing capabilities for parts procurement and recall, cataloging, and inventory management. Relationships with insurers, customers, and B2B e-commerce give you a competitive edge.
LKQ’s EBITDA comes from four segments. North America accounted for 44.6%, followed by Europe at 34.2%, followed by Specialty at 12.3%, and self-service where customers select parts at 8.9%.
The North America segment is a leading provider of aftermarket and recycled crash repair parts. We also remanufacture engines, transmissions, rear axles, turbos and hybrid batteries.
The company has built a scale-driven cost advantage in its business. Customers appreciate LKQ’s consistent wide range of parts availability and fast delivery. LKQ helps customers complete repairs faster, increasing productivity at lower costs. LKQ’s estimated fulfillment rate for salvage parts is around 75%, compared to around 25% for its competitors.
LKQ’ uses company-owned trucks to move inventory between warehouses. This allows LKQ to shorten the order lead time to customers in a cost-effective manner.
If the economy slows, LKQ will benefit, as consumers typically delay new car purchases. Owners can keep their vehicles on the road longer at a lower cost with non-OEM recycled parts.
The company sources recycled cars from auto auctions. LKQ bidders 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 and is more profitable than its smaller peers.
Historically, the company has used acquisitions to build its capabilities and footprint, but that has changed over the past few years. Aim for small acquisitions, not deals.
LKQ has annual sales of $12.9 billion and 46,000 employees. Institutional investors own 97.9% of him and 2.0% are sold short. Their return on equity is 22.6% and their return on invested capital is 14.0%. Free cash flow yield per share is 4.6% and share repurchase yield per share is 8.1%. Their Piotroski F score is 5, indicating some strength. Their price-to-book ratio is 2.8.
Q3 Quarterly Financial Results and Full-Year Outlook
LKQ announced in a press release that it posted third quarter revenue of $3.1 billion. LKQ reported Q3 EPS of $0.97, slightly above consensus. The Wholesale North America segment beat expectations, with organic parts and services revenue growing 4.8% annually. But that wasn’t enough to offset the declines from exchange rates and sales, and earnings fell 5.9% from last year’s third quarter.
45% of total revenue in the third quarter came from recycled parts, 17% from new aftermarket parts, 15% from Specialty including marine, powersports and E-Bikes, 14% from European operations, 7% from other, And choose parts from 2% self-service.
Supply chains continue to be an issue and management described currency headwinds in Europe. LKQ’s third-quarter sales fell 5.9% to his $3.1 billion for the year. Revenues were down primarily due to exchange rates (690 basis points impact) and business divestitures (210 basis points headwinds). On a constant currency basis, the company’s sales increased by 1.0% each year.
LKQ said aftermarket and recycling demand remains strong given the aging fleet and restrictions on new vehicle sales. His LKQ EBITDA margin by segment shows 18.3% for the North American business, 10.2% for the European business and 12.0% for the Professional business business in 2021.
Management has lowered its adjusted EPS guidance for 2022. At the midpoint, guidance 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 downward impact on adjusted EPS closing out 2022.
Balance sheet improvement and share buyback
LKQ plans to divest some smaller non-core businesses to simplify its operating model and improve profitability. Proceeds are used to reduce debt and are returned to shareholders through share buybacks and dividend payments.
LKQ’s variable cost structure allows it to adjust to changes in the current environment. His $1 billion cost-cutting plan for the company can 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 service and share buybacks boost EPS.
Management is also committed to stock repurchases, as evidenced by the current stock repurchase program. LKQ repurchased $891 million in the first nine months of 2022, $877 million in 2021, $117 million in 2020 and $292 million in 2019 .
Good technical entry point
LKQ closed at $54.33 on November 30th. I added green Fibonacci lines using LKQ’s last 5 year highs and lows. It will be interesting to see how the market pauses or bounces around these Fibonacci lines. They could be one clue as to where the stock might be heading: LKQ is above the 76.4% Fibonacci retracement level but could drop further. A patient investor might wait and see if he can buy LKQ for $50 or so.
The average one-year price target of the three most accurate analysts is $66.17, indicating a potential upside of 21.7% from November 30’s close of $54.33, if correct. Their ratings are all buys. Analysts are just one of my indicators, they’re not perfect, but they usually give rough estimates, or at least point you in the right direction. They often seem a little optimistic, so I think the price could be lower than their one-year target to be on the safe side.
Earnings per share, PER, and operating margin
The black line shows LKQ’s stock price over the past 20 years. Looking at the chart of numbers below the graph, LKQ has revenue of $1.75 in 2019, $2.10 in 2020 and $3.68 in 2021, with expected revenue of $4.02 in 2022 and $3.65 in 2023. You can see that
LKQ currently has a PER of 13, but has averaged 20 over the past decade. I don’t think PER will go back to 20 anytime soon. If LKQ made a profit of $3.65 in 2023, the stock could trade at $55.11 if the market only allocated a P/E ratio of 15.1.
LKQ’s operating margin has shown improvement over the past few years.
Selling Covered Call
My answer to uncertainty is to sell covered calls on LKQ after 6 months. LKQ closed at $54.33 on November 30th. A patient investor should be able to buy his LKQ at or near $50.00 in the coming weeks or months. Then in May he can sell the eligible call for $50.00. One covered call requires the purchase of 100 shares of stock.
LKQ’s share price will rise as demand rises as it cuts costs from business consolidation and as more cars are on the road each year and their average age increases. Buy LKQ and sell $50 covered calls when LKQ is close to $50.00 to increase returns and reduce risk while earning dividends.