Morningstar | LKQ Reports Solid 3Q Results as Stahlgruber Acquisition Shows Promise; Raising FVE to $47
Narrow-moat-rated LKQ, which provides alternative and specialty parts to repair and accessorize vehicles, reported third-quarter earnings per share before special items of $0.56, in line with the consensus but $0.11 higher than the $0.45 reported in the same period a year ago. Organic parts and service revenue growth was a healthy 4.3% while acquisitions added 23.2% and favorable currency translation added 0.6%. Total consolidated revenue, including LKQ’s scrap metal business, was up 26.6% to $3.1 billion versus $2.5 billion reported in the third quarter of 2017. The 5-star-rated LKQ shares currently trade at an attractive 43% discount to our $47 fair value estimate.Europe organic growth was a modest 2.0% as price competition affected revenue. Growth in Europe was also hurt by exceptionally warm weather in the third quarter. North America third-quarter organic growth was in line with management's long-term target of 4%-6%, at 5.2%. However, performance in North America was partially hit by lower scrap prices. Specialty was a bright spot with organic growth of 8.0% due to increased RV demand and especially a strong economy in the United States.
As a result of lower scrap prices anticipated in the fourth quarter, management tweaked guidance. The new guidance decreased adjusted income from continuing operations guidance by $30 million, to $690 million-$710 million. This resulted in a $0.07 decrease in the midpoint of EPS guidance to $2.19-$2.25. However, we are increasing our fair value estimate to $47 per share from $43 in part because of the Stahlgruber acquisition, which closed June 30.
LKQ is a holding company. Through its subsidiaries, the company provides alternative vehicle collision replacement products and alternative vehicle mechanical replacement products. The company is also a provider of alternative vehicle replacement and maintenance products in the United Kingdom, Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland, Slovakia, Austria, and other European countries. In addition to its wholesale operations, the company operates self service retail facilities across the United States that sell recycled automotive products from end-of-life-vehicles. The company is also a distributor of specialty vehicle aftermarket equipment and accessories.
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