LKQ Continues to Grow Through Buyouts, Low Margins a Woe

On Nov 6, we issued an updated research report on LKQ Corporation LKQ.

On Oct 26, LKQ Corp. reported earnings per share of 45 cents for third-quarter fiscal 2017 (ended Sep 30, 2017), beating the Zacks Consensus Estimate of 42 cents. Revenues improved 11.7% year over year to $2.47 billion. The top line also surpassed the Zacks Consensus Estimate of $2.37 billion.

For the fiscal-end, LKQ Corp. expects organic revenue growth for parts & services in the range of 4-4.5% compared with the prior guidance of 4-4.25%. Adjusted income from continuing operations is likely to be in the band of $575-$595 million, up from the prior expectation of $570-$595 million. Adjusted earnings per share in 2017 are expected in the band of $1.86-$1.92, up from the former projection of $1.84-$1.92.

LKQ Corporation Price and Consensus

LKQ Corporation Price and Consensus | LKQ Corporation Quote

Its repair products catering to the automotive aftermarket makes it less exposed to the cyclical nature of the automotive industry. Also, with the growing used-vehicles market and an increase in the average age of automobiles in the United States, the company might witness a rise in demand for its repair products.

LKQ Corp. has also been making frequent acquisitions to expand its presence. During the third quarter, it acquired 11 companies, including two in the United States and nine in Europe. Apart from acquisitions, the company has been opening new ECP branches for counter sales and distribution centers in Europe.

However, these acquisitions are weighing on LKQ Corp.’s gross margin. For instance, the buyout of Rhiag and PGW has lowered gross margins, which sees a massive drop from the historical levels the company once reached. This downtrend has been affecting the overall figure.

Also, for fiscal 2017, the company expects capital expenditures in the range of $175-$200 million. Fluctuating prices of fuel, scrap metal and other commodities plus product recalls might induce increased expenditures.

The stock has seen the Zacks Consensus Estimate for annual earnings being revised 1.1% upward over the last 30 days.

Price Performance

Shares of LKQ Corp. have outperformed the industry it belongs to. The stock has gained 22.8% year to date versus the industry’s 2.6% decline.

Zacks Rank & Key Picks

LKQ Corp. carries a Zacks Rank #3 (Hold).

Some better-ranked companies in the auto space include Navistar International Corp. NAV, Cummins Inc. CMI and Ford Motor Company F. While Navistar and Cummins sport a Zacks Rank #1 (Strong Buy), Ford carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Navistar has an expected long-term growth rate of 5%.

Cummins has an expected long-term growth rate of 12.4%.

Ford has an expected long-term growth rate of 10.7%.

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