LKQ Corp: A Cash for Clunkers Pure Play

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 |  About: LKQ Corporation (LKQ)
by: Tate Dwinnell

The Cash For Clunkers program has been wildly successful, burning through the initial $1 billion allocated to the program within a couple weeks. Harry Reid has said that the Senate will OK another $2 billion before the August recess. The obvious beneficiaries are the auto makers and auto parts suppliers, but one pure play may be overlooked and that’s LKQ Corp (LKQX), which is the largest auto parts recycler in the nation with 280 facilities.

What happens when a clunker is exchanged for a new vehicle? It’s not as easy as reselling as a used vehicle which the program prohibits. The dealer is required to kill the engine and destroy the vehicle. The vehicle may be parted out (as long as it’s not the engine or drivetrain), but parts must be sold within 180 days. LKQ has setup a program to make that process relatively painless.

On July 22nd, the company announced the LKQ Assured CARS Disposal program to assist auto dealers by providing certification of proper destruction, free towing and payment upon pickup. Should the company have trouble selling the parts within the 180 days, it could unload the some of the material to scrap metal dealers for a profit.

Fundamentally, LKQ is an extremely steady company, posting earnings growth of 15 – 30% every year since its IPO in 2003. Margins are a bit tight and growth has slowed considerably in the last three quarters, so not characteristic of what I would call a home run stock, but a company that continues to run as a well oiled machine. (Conference Call Transcript)

Technically, this is a stock that is considerably overbought but remains significantly bullish. It’s currently carving out a short, cup with handle base (high handle) with a successful breakout putting the stock in a position to test the 22 level.

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Disclosure: I have no position in LKQX.