Europe Holds LKQ Back as Growth Slows

The auto parts company didn't do as well as it had hoped in 2018. Here's what could be different this year.

Dan Caplinger
Dan Caplinger
Feb 28, 2019 at 9:03AM
Consumer Goods

The health of the global economy has been very different across various regions, with some performing better than others. Although the U.S. economy has largely avoided the difficulties faced elsewhere, key areas like Europe have seen a lot of pressure. That's affected international companies like auto parts specialist LKQ (NASDAQ:LKQ), and given the parts maker's specialty in high-end products, it's reliant on end users feeling flush enough financially to pay up for its parts.

Coming into Thursday's fourth-quarter financial report, LKQ investors expected that the company would be able to produce good results on the top and bottom lines. Although LKQ wasn't able to deliver the gains for 2018 that it had hoped, it nevertheless sees a lot of good things coming down the road in the coming year that it believes could bolster its business over the long run.

Hubcaps, lights, and various coating products all lined up in two rows.

Image source: LKQ.

LKQ keeps the engines revving

Fourth-quarter results showed what the parts maker has done to keep growing. Revenue came in at $3 billion, up 22% and just short of the $3.01 billion that most of those following the stock had expected. Adjusted net income from continuing operations picked up 20% to $151.3 million, and that produced adjusted earnings of $0.48 per share. That figure was higher by $0.07 from the year-ago quarter, but it fell short of the $0.50 per share consensus forecast for the quarter among investors.

Again, as we've seen for several quarters now, LKQ relied largely on acquisitions to boost its growth rate. Organic revenue growth amounted to 3% overall, with 20 percentage points of growth coming from purchased businesses. Foreign exchange impacts cost LKQ about 1.5 percentage points of top-line growth.

LKQ's various businesses reflected the different conditions the company faced across the globe and in key industry sectors. In the parts and services business, organic growth of 2.5% came largely from the North American and specialty parts divisions. The specialty segment reported a 5.8% rise in organic growth, with a small additional influence from acquisitions. North America remained relatively healthy at 3.7%, although that pace of growth slowed from previous quarters.

Europe was the primary culprit in terms of organic growth, which rose 0.3%. But because the acquisitions that LKQ made over the past year centered largely on Europe, its total growth was by far the largest.

LKQ's other-business segment was again noteworthy. Its organic growth of 10% helped lift the parts maker's overall success, despite the small size of the segment.

What's ahead for LKQ?

CEO Dominick Zarcone put 2018's results in context. "While I acknowledge that the 2018 results didn't live up to our initial expectations due to operational challenges in parts of the business and economic headwinds, particularly in Europe," Zarcone said, "I believe that we are taking the necessary steps to position the company for continued success." He noted that the efforts to complete and integrate the acquisition of German wholesale auto parts distributor Stahlgruber were important in keeping LKQ on its strategic path.

LKQ remains optimistic for 2019, although CFO Varun Laroyia was evenhanded in discussing both challenges and opportunities. "While we expect revenue growth to moderate from past levels," Laroyia said, "we believe that our margin enhancement initiatives will boost profitability in 2019 despite headwinds from lower scrap metals prices and a strengthening dollar."

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LKQ's guidance for 2019 reflected this guarded optimism. The company believes that organic growth for 2019 will slow to just 2% to 4% in the key parts and services segment. Adjusted earnings of $2.34 to $2.46 per share for the year would represent growth of 7% to 12% on the bottom line.

Shareholders in LKQ will have to get used to the idea that slower growth is likely to remain in place over the coming year. Yet with efforts to contain costs and a focus on its most profitable opportunities, LKQ looks to be making the most of tough conditions to maximize its chances of making as much money as it can.

Check out the latest LKQ earnings call transcript.