Nearly everyone needs to replace parts in their automobiles from time to time, and the auto parts industry has turned into a huge business. LKQ (LKQ -1.09%) takes a different tack on the space, claiming the status of global leader in alternative replacement auto parts from both aftermarket and recycled channels. Record auto sales in recent years have lifted the prospects for the auto industry, and that has helped pay off for LKQ as well.
Coming into Thursday's second-quarter financial report, LKQ investors were prepared for a pause in the company's recent rebound, but the parts specialist managed to come through with better figures on the top and bottom lines. With an optimistic outlook for the future, LKQ believes it can keep its positive momentum going for the rest of the year and beyond. Let's look more closely at LKQ and what its latest results say about what's to come for the parts company.
Auto parts have enjoyed solid demand across the industry. Image source: Getty Images.
LKQ picks up speed
LKQ's second-quarter results were solid in most investors' eyes. Revenue climbed nearly 7% to $2.46 billion, which was slightly stronger than what most of those following the stock had expected to see. Adjusted income from continuing operations was $163.3 million, up 2% from the year-ago period, and adjusted earnings of $0.53 per share not only grew from year-earlier levels, but topped the consensus forecast for $0.52 per share.
Looking more closely at LKQ's report, the company saw good numbers throughout its reporting segments. The key North American business enjoyed a 5.5% rise in segment revenue compared to year-ago levels, but as we've seen previously, Europe had larger gains of almost 8% year over year. The specialty segment posted 5.5% sales gains as well, and a nearly 12% rise in LKQ's catch-all "other" category put icing on the cake for the company.
Acquisitions continued to make a huge difference for LKQ's top-line gains. Overall, about five percentage points of growth came from newly acquired businesses, compared to overall organic growth of 4.2%. Foreign currency impacts cost the company more than two percentage points of sales growth, with declines in Europe weighing down LKQ's entire income statement.
Segment profits were mixed. In North America, the company secured an almost 5% rise in pre-tax operating profit, and the specialty segment did even better, putting up double-digit percentage growth. Europe didn't do as well, with a 7% drop weighing down LKQ's overall growth.
LKQ kept executing on its acquisition strategy for growth. During the quarter, the company bought seven companies, including a salvage yard and transmission business in the U.S. as well as various distributors and specialty products businesses across Europe. The company's European division also opened a dozen new branches in Eastern Europe and one new branch in its U.K. market.
Can LKQ keep accelerating?
New CEO Dominick Zarcone, who stepped in when former chief executive Robert Wagman had to leave the position for health reasons, was happy with LKQ's results. "We were particularly pleased to see our North American segment report an improvement in organic revenue growth for parts and services to 2.8%," Zarcone said, "despite the ongoing headwinds of the mild weather witnessed in the first quarter of 2017." The CEO also pointed to the specialty business and LKQ's European success as drivers of future growth.
LKQ did make some guidance changes in both directions. The parts maker raised the bottom end of its ranges for adjusted income and adjusted earnings per share from continuing operations by modest amounts, with a new range of $1.84 to $1.92 per share expected. Operating cash flow got a $5 million boost to a new range of $620 million to $650 million, but LKQ cut the top end of its organic revenue growth forecast, now looking for between 4% and 5.25% growth for parts and services.
LKQ shareholders reacted favorably to the report, and the stock was up about 2% in the morning session following the announcement. Auto parts have been a lucrative area for companies lately, and LKQ's fundamental strength should help it thrive if industry conditions remain as strong as they've been in the recent past.
