The auto parts industry is a good indicator of the health of the broader economy, and LKQ (NASDAQ:LKQ) serves as a signal for business conditions tied to upscale customers because of its specializing in high-end parts. For a while, LKQ has used strength in the North American market to offset weakness elsewhere around the world, especially Europe. Yet with new concerns about whether the U.S. economy will be able to keep expanding, some fear that it'll be tougher for industrial companies to find growth close to home.
Coming into Thursday's first-quarter financial report, LKQ investors had wanted to see sizable revenue gains and at least modestly higher earnings. LKQ's sales growth didn't match up to what most had wanted to see, and the company said that headwinds could hold it back from being as successful as it could be with its strategic plans for the rest of the year and beyond.
LKQ drives ahead
First-quarter results showed continued slowing in its growth. Revenue of $3.10 billion was up 14% from year-ago levels, but that was less than the 16% growth that LKQ investors had hoped to see. Adjusted net income rose just 4% to $176 million, and that produced adjusted earnings of $0.56 per share, matching the consensus forecast among those following the stock.
Without the acquisitions that LKQ has made over the past year, growth would have slowed to a standstill. The auto parts manufacturer said that organic revenue actually dropped 0.3% companywide from where it was 12 months ago, with acquisitions accounting for 17 percentage points of growth and foreign exchange cutting 3 percentage points off the top-line increase.
Looking at LKQ's segments, you can see how tough industry conditions have weighed on the business. In parts and services, organic growth was just 0.1%, with slight gains in Europe and in the specialty-parts segment just barely outweighing the downward pressure from a 1.4% organic sales decline in North America. European acquisitions were primarily responsible for the reported 15% rise in parts and services revenue overall. A 6% drop in sales for LKQ's other business segment weighed on the company's broader performance, reversing good results in recent quarters for that part of the business.
Can LKQ get moving in the right direction?
CEO Dominick Zarcone explained the factors affecting LKQ's results. "The business performed in line with our expectations, and we continue to make progress with our key productivity initiatives," Zarcone said, "despite tough revenue growth comparisons in North America, a challenging macroeconomic environment in Europe, and the negative year-over-year impact of scrap and exchange rates." He noted that cost containment and pricing initiatives helped to boost gross margin levels in North America by nearly a full percentage point, helping to offset the impact of higher raw material costs.
LKQ took some impairment charges to reflect assets that it expects to see in the near future, but apart from those, the auto parts company kept most of its guidance for the full 2019 year unchanged. That includes calls for organic growth of 2% to 4% in the parts and services segment, adjusted earnings of $2.34 to $2.46 per share, and operating cash flow of $775 million to $850 million.
Shareholders in LKQ didn't seem too happy with the revenue shortfall, and the stock dropped 7% in pre-market trading following the announcement. Until economic conditions begin to improve, especially in international markets, LKQ will have to work hard just to hold its own in an increasingly competitive and economically sensitive industry.