Shares of LKQ (LKQ) continue their impressive long-term move upwards after the company announced yet another sizable acquisition.
The addition of Keystone Automotive seems fair and adds significantly to LKQ's operations. While I applaud the deal, the runaway momentum in its share price has made shares far too expensive to my taste to initiate a position at the moment.
LKQ announced that the firm has agreed to acquire Keystone Automotive Operations. The company will pay $450 million for the distributor and marketer of specialty aftermarket equipment and accessories.
Keystone was founded back in 1971 and currently employs 1,500 workers in 25 locations. It supplies specialty retailers and equipment installers through North America for truck and off-road markets, recreational vehicles, towing, wheels, tires and other accessories.
Keystone expects to report revenues of $700 million in 2014, while seeing EBITDA margins around 10%. The deal is expected to be accretive to next year's earnings, excluding restructuring and acquisition related charges.
The deal is subject to normal closing conditions, including regulatory approval, and is expected to close in the first quarter of 2014.
Back in October of this year, LKQ released its third quarter results. The company ended the quarter with $107 million in cash and equivalents and operates with $1.31 billion in debt, resulting in a net debt position of around $1.2 billion. The $450 million deal will be financed within the firm's credit facility.
On the back of acquisitions and solid organic growth, LKQ has steadily grown its operations. Revenues for the first nine months of the year came in at $3.75 billion, up 22.6% on the year before. Net earnings rose by 17.4% to $233.8 million in the meantime. At this pace, revenues are seen around $5 billion, while earnings could top $300 million.
Trading around $33 per share, the market values LKQ at $10.0 billion. This values the firm at nearly 2.0 times annual revenues and 33 times annual earnings.
LKQ does not pay a dividend at the moment.
Some Historical Perspective
Long-term investors in LKQ have seen great returns, driven by a solid expansion in its operations, which on itself has been based on solid organic growth and acquisitions.
Shares rose from merely $2 in 2004 to current highs in their low thirties, offering investors outstanding returns. Between 2009 and 2013, LKQ is on track to increase its revenues by around 150% to $5 billion. Earnings growth is seen at a similar pace, with earnings seen around $300 million.
Despite the aggressive growth, LKQ's share base has been relatively stable, while the net debt position increased towards $1.2 billion.
LKQ keeps expanding at an aggressive pace and shareholders love the company for doing so. The debt position is manageable and the strong track record has resulted in shares outpacing operational improvements, giving the shares a premium valuation versus competitors. So far this year, shares of LKQ have risen some 50% to fresh all time highs.
The deal will expand LKQ's operations much further. Annual revenues are set to increase by some 15% to a current rate of $5.7 billion. EBITDA could see a more modest 12% boost given the slightly lower profitability of the business.
The $450 million price tag values Keystone at 0.65 times annual revenues and roughly 6.4 times estimated EBITDA. This compares to LKQ's own valuation at nearly 2.0 times annual revenues and valuation at roughly 16.7 times EBITDA. This makes the valuation attractive at first sight, even as EBITDA margins at Keystone are seen around 10%, little below the 12.2% reported by LKQ for the first nine months of this year.
Note that LKQ's valuation is very high both on an absolute and relative basis, largely driven by the premium valuation of LKQ's shares on the back of the strong track record of the firm.
I can only applaud the recent addition, which seems very fair, especially compared to LKQ's own valuation. Note that I did not factor in any estimated synergies following the deal. While the net debt position will increase towards $1.6 billion following this deal, this appears to be manageable. Yet, I would be happy to see LKQ scheduling down the acquisition pace going forward and focus on integration and deleveraging next year.
While the company is a real winner, the share price has more than reflected this already, making the valuation way too high for me to initiate a position at current levels. I will only reconsider my stance if shares might see a decent correction in the coming period. For now, I remain on the sidelines.