LKQ Corp. Turns Trash Into Cash

| About: LKQ Corporation (LKQ)

LKQ Corp. (LKQX) is a nationwide recycler of damaged cars. LKQ buys wrecked cars at auction and distributes the reusable parts to collision repair and mechanical repair shops. LKQ buys popular models such as the Honda (NYSE:HMC) Accord, Toyota Camry (NYSE:TM), and Ford (NYSE:F) Explorer, from which it salvages reusable parts including engines, front end assemblies, doors, and fenders. The company sells mechanical parts that can't be reused as-is to parts reconditioners; items such as fluids, batteries, and tires are sold to other recyclers. LKQ operates from more than 100 facilities throughout the US.

You may not have heard of LKQ, but it's a big business and growing. Revenues were $547 million last year, expect to be $785 million this year and $900 million next year. Profits are following right behind. Earnings Per Share last year were 63 cents. This year, the total should be 81 cents, and next year look for $1.00. That's turning crash trash to cash.

LKQ is a consolidator in this very fragmented industry. There are many local companies buying crashed cars and selling parts to repair shops or insurance companies. LKQ is one of the few national companies, and by using its size, it can purchase the best local shops, increase their efficiencies and open up the entire U.S. for selling parts. Last year, LKQ bought 9 companies, the largest being Transwheel Corp, an aluminum alloy wheel refurbishing and distribution business. Transwheel also has an aluminum smelter business that melts damaged and unusable wheel cores. This particular endeavor has not been as profitable as others and management may sell it to increase margins.

The winter months are especially good for business: deer season, bad weather and fewer daylight hours all contribute to a higher accident rate than the spring and summer months experience. While there is a small seasonality to the business, revenues are only marginally increased in the winter.

The company has some good numbers: Current assets are more than 3 times current liabilities. Return on Equity is 12% this year, up from 9% last year. Officers and directors own about 21% of the company. The stock has gone from a low of $6.60 in 2004 to as high as $25.60 this year. It's trading off a little from that now. As well it should. With a P/E (price to earnings) ratio of 31 (based on trailing twelve months earnings), that's a rich price to pay. If earnings come in next year at $1, the forward p/e is still a relatively high 22. Most companies reporting earnings are trading around 18, as an average.

Investors expect good growth from LKQ. So far, they haven't been disappointed. But the stock has been levelling out for the last year, after its great run in 2005. Unless growth continues to ramp as it has in the last few years, the stock may be fully priced right now.

LKQX 1-yr chart


Disclosure: Author has no position in LKQX.