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Why Shares of LKQ Dropped in May

By Lou Whiteman – Jun 7, 2019 at 6:01PM

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Tariff wars and fears of an automotive slowdown weighed heavily on the stock.

What happened

LKQ Corp. (LKQ 0.83%) has spent the last two decades transforming itself from a scrap-and-salvage specialist into a diversified distributor of automotive parts. Alas, those deepening international ties to the automotive sector weighed on LKQ in May, sending the company's shares down 14.8% for the month, according to data provided by S&P Global Market Intelligence.

So what

LKQ's downward drift began prior to May 1. Investors were disappointed by first-quarter results that included revenue growth that fell short of expectations. For years, LKQ has used North America to offset weakness in Europe, but in the first three months of 2019, the company experienced downward pressure on sales in North America.

A collection of auto parts, including a tire, a battery, etc.

Image source: Getty Images.

The pressure on North America intensified in May. Auto sales have come under fire due to fears of a downturn that were heightened by the ongoing talk of a trade war with China and a late May push by the White House to impose new tariffs on Mexican imports. Mexico plays a vital role in the automotive supply chain, and parts makers and distributors would likely pay a heavy price if new trade taxes are enacted.

Now what

Despite the May swoon, LKQ is still up nearly 12% for the year, but the company was up more than 30% year to date as of late April. The stock's performance has improved in the early days of June, likely thanks to a calming of rhetoric between the U.S. and Mexico.

Over the past decade, LKQ has been an impressive growth story and a long-term winner. Over the long term, there's no reason to worry that that sort of performance won't continue. But investors in May got a reminder that macro events can have a chilling effect on operations.

Until the trade wars are behind us, be on the watch for continued volatility.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends LKQ. The Motley Fool has a disclosure policy.

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