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Will Weak European Market Mar LKQ Corp's (LKQ) Q3 Earnings?

Zacks Equity Research

LKQ Corporation LKQ is slated to release third-quarter 2019 results on Oct 31, before the opening bell. The Zacks Consensus Estimate for the quarter to be reported is earnings of 57 cents per share on revenues of $3.1 billion.

The aftermarket auto parts distributor came up with better-than-expected results in the last reported quarter on the back of higher-than-anticipated profits from the North American segment. As far as earnings surprises are concerned, the company managed to surpass estimates in two of the trailing four quarters, with the average positive surprise being 0.34%.

LKQ Corporation Price and EPS Surprise

LKQ Corporation Price and EPS Surprise

LKQ Corporation price-eps-surprise | LKQ Corporation Quote

Investors are expecting LKQ Corp to top earnings estimates this season as well. However, our model does not indicate an earnings beat for the company for the to-be-reported quarter.

Which Way are Top and Bottom-Line Estimates Headed?

The Zacks Consensus Estimate for third-quarter earnings per share has been downwardly revised by a penny to 57 cents in the past seven days. The estimated figure indicates a marginal increase from the year-ago reported earnings of 56 cents per share. The Zacks Consensus Estimate for revenues is pegged at $3,119 million, suggesting a nominal decrease from the prior-year reported figure of $3,122 million.

Factors Setting the Tone

Challenging macroeconomic environment in Europe and uncertainty over Brexit are likely to have negatively impacted its overall consumer demand in the United Kingdom. With Europe being a major market for LKQ Corp, lower vehicle sales amid weakening consumer demand and soft economic conditions are expected to have hampered the firm’s top line. Evidently, the Zacks Consensus Estimate for the to-be-reported quarter’s revenues is pegged at $1,448, suggesting a sequential and year-over-year decline of 4.2% and 1.1%, respectively. Resultantly, the Zacks Consensus Estimate for the European segment’s EBITDA stands at $115 million, implying a decline from $129 million and $116 million recorded in the second quarter and year-ago period, respectively.

Despite softness in Canada amid weak economy and lower dealer retail sales, healthy demand for light trucks and SUVs is expected to have positively contributed to the Specialty segment’s revenues. Favorable dynamics for the recreational vehicles (RV) business and RV replacement parts offerings are likely to have bolstered the company. As such, the Zacks Consensus Estimate for the Specialty segment’s revenues is pegged at $396 million, pointing to growth from $389 million in third-quarter 2018. However, operational inefficiency is likely to have clipped its profit margins for the quarter to be reported. Notably, the Zacks Consensus Estimate for EBITDA from the Specialty unit stands at $42.88 million, indicating fall from $42.94 million and $52 million in the year-ago quarter and last reported quarter, respectively.

Meanwhile, with growth in the U.S. used-car vehicle markets and increase in the average number of automobiles, the company is likely to have benefited from revenue growth in North America. The Zacks consensus Estimate for revenues and EBITDA from the North American segment is pegged at $1,133 million and $165 million, suggesting year-over-year rise of 2.1% and 7.1%, respectively.

All in all, while the North American market is likely to have buoyed the firm, weakness in European markets and high operating expenses are expected to have dented its overall margins in the quarter to be reported.

What Our Model Says

Our proven model does not conclusively predict an earnings beat for LKQ Corp in the quarter to be reported. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is -1.45%.

Zacks Rank: LKQ Corp currently has a Zacks Rank #4 (Sell).

Stocks to Consider

Here are some companies, which according to our model have the right combination of elements to post an earnings beat in the third quarter.

Booz Allen Hamilton Holding Corporation BAH is set to report quarterly earnings on Nov 1. The firm carries a Zacks Rank #1 (Strong Buy) and has an Earnings ESP of +3.69%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Brighthouse Financial, Inc. BHF is set to report quarterly earnings on Nov 4. The firm carries a Zacks Rank #3 and an Earnings ESP of +11.14%.

Acadia Healthcare Company, Inc. ACHC is set to report quarterly earnings on Nov 5. The stock has a Zacks Rank #3 and an Earnings ESP of +1.34%.

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