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LKQ Keeps Firing on All Cylinders

By Dan Caplinger - Feb 22, 2018 at 9:35AM

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Find out what's pushing the auto parts company's business forward.

Auto parts are big business, and LKQ (LKQ 2.00%) prides itself on the specialty and alternative auto parts and accessories that it makes to differentiate itself from more run-of-the-mill competition. Given the way that the auto industry has performed lately, LKQ has done a good job of tapping into demand and finding ways to boost its overall business.

Coming into Thursday's fourth-quarter financial report, LKQ investors were looking for solid gains in sales and profits. The company didn't meet all of those expectations, but it nevertheless sees good performance coming for 2018. Let's look more closely at LKQ and what its latest results say about its future.

Wheel rims, reflector lights, and other auto parts along with a range of car supplies.

Image source: LKQ.

LKQ moves ahead

LKQ's fourth-quarter results showed the payoff that the auto parts company has gotten from its long-term efforts to maximize its business prospects. Revenue jumped 15% to $2.47 billion, accelerating from its pace last quarter and easily topping the 10% projections that analysts following the stock had made. Adjusted income from continuing operations was up 17% to $126 million, and that worked out to adjusted earnings of $0.41 per share, missing the consensus forecast among investors by just $0.01 per share.

LKQ got growth both organically and from acquisitions. The company said that in the key parts and services business, organic revenue growth amounted to 4.8%, with acquisitions adding another 6 percentage points of gains. The weak U.S. dollar also had a favorable impact, sending overall parts and services revenue growth up 14% for the quarter.

LKQ got its biggest gains from its overseas operations. Europe saw the strongest growth, with revenue rising almost 25%. Acquisitions were responsible for almost half of those gains, but the strength of the euro and British pound also contributed 8 percentage points to its sales gains for the segment. By contrast, the North American market saw revenue gains of only 7%, although the relative lack of acquisition and currency impacts left their organic growth rates the same.

Elsewhere, the acquisition of Warn Industries last November helped to send specialty segment revenue up 12% from year-ago levels. Higher scrap-steel and metals prices boosted the revenue that LKQ gets from sources other than parts and services by 26%.

Europe was also stronger in terms of profits. LKQ enjoyed a 22% rise in segment pre-tax operating earnings in Europe, compared to about 10% for North America. Specialty parts split the difference with a 13% bottom-line rise.

Acquisition activity slowed during the quarter. LKQ bought just five businesses, including three in North America and two in Europe. The company also said in December that it would acquire German aftermarket-parts wholesaler Stahlgruber, expecting the deal to close in the first half of 2018.

Can LKQ keep up the pace?

CEO Dominick Zarcone had a lot of positive things to say about how LKQ did. "Our 2017 results reflect the underlying strength of our business," Zarcone said, "and our ability to grow both organically and through acquisitions, despite headwinds we faced earlier in the year." The CEO also pointed to strong profit margin figures in building momentum for the coming year.

LKQ's guidance for 2018 looks encouraging. The parts maker expects 4% to 6% organic growth in the parts and services unit, with adjusted net income of $720 million to $750 million working out to adjusted earnings between $2.30 and $2.40 per share. Both figures are better than what those following the stock had anticipated, reflecting the enthusiasm that LKQ has to keep finding new ways to grow.

LKQ shareholders did seem entirely comfortable with the slight earnings miss for the fourth quarter of 2017, and the stock eased lower by about 1% shortly after the market opened following the announcement. In the long run, LKQ looks well-positioned to keep finding ways to boost its business and capture a greater portion of the auto parts market globally.

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