LKQ Corp: Slight Shift in Growth Strategy

|
 |  About: LKQ Corporation (LKQ)
by: Jerry Marks

The initial reaction (judging by the stock price) to the earnings seems negative, but the major stock indexes are all down pretty big. From my standpoint, while I was a little disappointed to see the company's expense leverage erode (SG&A as a percent of revenues), overall I thought the results were pretty good. LKQ reported net income of $10.2 million, or $0.18 per share, right in-line with my forecast. And same-store facility (top line) growth was north of 11%.

I think the most important thing to take note of from the release was LKQ's 4Q06 acquisition announcements. Remember it is the long term growth prospects we are concerned with, not the ebbs and flows of a quarter.

LKQ acquired three businesses in the fourth quarter: Eagle Aftermarket, Potomac German Auto, and Northern Light Refinishing. Eagle is consistent with the company's aftermarket (generic) parts acquisition strategy. Potomac is consistent with the company's recycled automotive aftermarket (collision repair) facility acquisition strategy.

But the Northern Light Refinishing facility marks the second "refurbishing," or "re-manufactured parts" acquisition the company has made in the last year or so. Commenting on the Northern Light Refinishing facility, CEO Joe Holsten in the release said: "a business that refurbishes recycled OE headlights which will allow us to obtain value from lights we formerly would have discarded."

I think the acquisition makes a lot of sense. But like I indicated above, I think we should start to take note that there is a slight shift occurring in the company's growth strategy. In the past, you would see the company acquiring recycled yards and aftermarket (generics parts warehouses).

The acquisition of Northern Light therefore marks another "vertical" acquisition (versus horizontal) where LKQ has gained re-manufacturing (in this case headlights) capabilities that will allow the company to better utilize its existing asset and distribution base (by re-manufacturing versus discarding the headlights).

4Q06 Total same-facility sales: up 11.2%

4Q06 Gross profit: 44.8% down from 46.9% (likely due to smelter operation.)

SG&A as a percent of gross: 13.2%, down from 13.6% in the prior year period.

Tax rate: 39.9% versus 38.2% last year

Share count: 56.2 million versus 54.574 million last year.

Long-term debt/cap: 18.6%

LKQX 1-yr chart:

LKQX 1-yr chart