Company Reports

We raised our fair value estimate on narrow-moat LKQ by 3% to $53 due to a slight uptick in our midcycle operating margin forecast to 10.4% (versus 10% previously). We currently view shares as undervalued as near-term demand pressures have weighed on the firm’s results in recent quarters. Still, we think LKQ enjoys a strong position in the highly fragmented auto parts distribution industry, buoying its long-term prospects.

Since forming in 1998, LKQ has established itself as a leading distributor of aftermarket and recycled auto parts in North America and Europe. We consider speed of service and low prices as primary sources of competitive advantage in the auto parts distribution industry, and we think LKQ boasts a solid edge over smaller independent and regional competitors in both regards. With time sensitive professional customers that seek to turn over service bays quickly, LKQ utilizes its vast distribution network to procure and deliver collision and mechanical parts on short notice. And particularly as it pertains to collision/body shop customers, there is value to having a ready assortment of salvage parts as insurance companies look to minimize repair costs. In our view, LKQ’s superior scale and product availability is evidenced by its industry-leading fulfillment rates, which typically stand around 95% for aftermarket parts (versus 65% from its competitive set) and 75% for salvage items (versus 25%).

Narrow-moat-rated LKQ’s second-quarter earnings fell short of expectations, as adjusted EPS of $0.98 came in $0.05 below the FactSet consensus estimate, sending shares down roughly 13% in intraday trading on July 25. We’ve lowered our fair value estimate to $51.50 per share from $53.20, which reflects our lowered revenue growth forecast, partially offset by time value of money. Shares are currently trading nearly 25% below our updated fair value estimate.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ guided to weaker first-quarter earnings, but the demand environment turned out to be lower than management had expected. This led the company to lower 2024 sales and EPS guidance. Organic revenue growth expectations were reduced to 2.5%-4.5% from 3.5%-5.5% previously. Diluted EPS is now expected to be between $3.32-$3.62 versus $3.43-$3.73 before. Following the earnings update, the market sent LKQ’s shares down approximately 14% in intraday trading.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ reported solid fourth-quarter earnings to close out 2023. On an organic basis, sales in the parts and services business grew nearly 3% year over year, while total revenue increased nearly 2% compared with the same period a year ago (includes other revenue). Sales increased in both North America and Europe, which were up roughly 5% and 4%, respectively, in the quarter.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ reported mixed third-quarter results due to profitability challenges. EBITDA margins were down across all segments. In North America, EBITDA margin contracted 240 basis points. The inclusion of Uni-Select’s financials had a 180-basis-point negative impact, since the acquired firm's products have lower margins than LKQ’s North American products. In Europe, EBITDA margin was down 200 basis points due to a nonrecurring tax charge (70 basis points), labor strike in Germany (40 basis points), and growing customer price sensitivity (90 basis points).

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

We elected to leave our fair value estimate of $46.50 for LKQ unchanged, following second-quarter earnings. We expect near-term demand to remain solid for the balance of the year. In North America, LKQ increased sales by nearly 5% year on year, thanks to stronger pricing (offset cost inflation). The company maintains that supply chains continue to improve, driving gains in aftermarket collision parts volume. Sales in Europe were up nearly 11% year on year, thanks to solid pricing. The growth in vehicle miles driven in Europe isn’t as high as it is in North America, but it’s still growing, supporting parts and services demand.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

We saw no major surprises in LKQ's first-quarter earnings, leading us to maintain our $46.50 fair value estimate. Top line was flat in the quarter, as organic revenue growth was offset by the PGW Auto Glass divesture and currency headwinds. On an organic basis, LKQ's North America business showed the strongest gains, increasing 14.4% in the quarter compared with the same period a year earlier. The company was able to raise pricing (more than offsetting cost inflation) and grow volumes in the region. Management highlighted improving supply chains helped drive aftermarket collision parts volumes.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company benefits from scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.

LKQ’s 2022 results came in slightly below our expectations, but we still chose to raise our fair value estimate to $46.50 per share from $45.50 previously. The increase is largely attributable to our more optimistic sales forecast starting in 2024. LKQ is a strong vehicle parts company, and we expect multiple secular tailwinds to help grow its revenue base throughout our forecast. In our view, demand for repairs will remain solid in the near term, given the growing and aging number of U.S. vehicles in operation.

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. We believe the company has built scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, improving productivity. We think the company’s strong distribution network will support its ability to keep order fulfillment rates high in both aftermarket and salvage products.