EUR 850.00 For Business Accounts Only

Morningstar | LKQ Updated Forecasts and Estimates from 23 May 2019

Narrow-moat LKQ reported first-quarter adjusted EPS of $0.56 that was in line with consensus. Revenue of $3.10 billion missed Wall Street estimates by 1%. The performance was solid given numerous headwinds, including weak macroeconomic factors in Europe and unusually low collision activity in North America, which CCC Information Services indicated was down 2.6% year over year. More central to our thesis is the ongoing progress in Europe, where LKQ continues to consolidate its catalogs and procurement activities. Management indicated that its centralized procurement contributed 50 basis points to its European gross margin improvement that came principally in the form of supplier rebates. LKQ’s European segment EBITDA continues to trail that of its North American segment by over 500 basis points. We believe management will ultimately bring European margins closer to those of LKQ’s more mature North American segment. As such, we feel the shares are undervalued and maintain our fair value estimate of $38.

Now that Europe is LKQ’s largest and least profitable segment after the Stahlgruber acquisition closed in 2018, we remain focused on management’s progress in the region. Despite macroeconomic headwinds, the segment’s organic growth of 1.3% was the highest in LKQ’s portfolio. As most of LKQ’s activities in Europe support mechanical repair, as opposed to collision, we feel any softness in underlying demand is transient as such repairs can be delayed but not avoided. In the event of a more significant downturn in Europe, the average vehicle age is likely to increase, which could drive mechanical repair volume.

LKQ’s North American segment was a bit more sluggish than we expected as organic revenue fell 1.4% year over year. Management cited an unusually weak collision season and one fewer selling day in the quarter compared with the prior year. Our recent conversations with body-shop owners reinforced our opinion that the LKQ value proposition remains strong.

LKQ’s larger strategy of continuing to grow the size and scope of its operations and capturing a greater share of its customers’ wallets was evident in the quarter. Its North American segment grew the number of collision SKUs and the total number of certified parts by 5.8% and 11.6% year over year, respectively. Shortly after the quarter ended, LKQ announced that it was acquiring Elite Electronics for an undisclosed sum. While the acquisition was small, it provides LKQ with valuable technology to address the rapidly growing vehicle diagnostics and calibration marketplace. More important, it will position LKQ to better address growing vehicle sophistication that could impede reverse engineering of components for the aftermarket.