LKQ Corporation: Set To Fall

| About: LKQ Corporation (LKQ)

Summary

The last year has been a bumpy ride for LKQ shareholders, down 3% and underperforming the GICS Distributors subindustry by 6%.

Both revenues and profits have been steadily increasing for several quarters as the company expands its European presence, primarily through acquisition.

Sales and EPS have missed analysts’ estimates on several occasions, meaning that the company is either providing optimistic forward guidance or is having difficulties forecasting company performance.

The stock price is on a downward trend after meeting resistance at $30.6. The price is sitting near a support level which may not hold.

I suggest waiting for a base to form then reevaluating the fundamentals before deciding whether or not to buy LKQ.

LKQ Corporation (NASDAQ:LKQ) distributes vehicle replacement parts used in the repair and maintenance of vehicles and recreational vehicle appliances in North America, Europe, and Taiwan. The company also operates self-service retail operations under the LKQ Pick Your Part name.

The last year has been a bumpy ride for LKQ shareholders, down 3% and underperforming the GICS Distributors subindustry by 6%. The subindustry includes Genuine Parts Company (NYSE:GPC), another auto parts distributor, and distributors in different market segments, such as Pool Corporation (NASDAQ:POOL) and Core-Mark Holding Company, Inc. (NASDAQ:CORE).

(Source:Portfolio123*)

* Portfolio123 is an affiliate link which give new sign-ups a 30-day free trial instead of 15 days.

The weak stock performance of late is a result of revenue misses on the last two quarters, which could be a result of the recent M&A activities and divestment of the OEM glass business.

Company Fundamentals

Both revenues and profits have been steadily increasing for several quarters as the company expands its European presence, primarily through acquisition.

The company's guidance for 2017 adjusted earnings is 10% growth from continuing operations versus 2016, expanding from $1.69 per share to $1.80 to $1.90 per share with a midpoint of $1.85.

(Source:Portfolio123*)

The table below highlights how LKQ compares to the GICS Distributors industry. Note that the industry includes companies in other than auto parts distribution.

(Source:Portfolio123*)

In general, LKQ has superior fundamentals compared to the distributors industry, including valuation, returns (ROE, ROI, ROA), and margins. One area that concerns me is the higher Debt/Equity Ratio which could become an issue longer term with rising interest rates.

Analyst Estimates

Sales and EPS have missed analysts' estimates on several occasions, meaning that the company is either providing optimistic forward guidance or is having difficulties forecasting future company performance. I tend to believe it is the latter, as LKQ has and is acquiring companies in Europe and divesting divisions. In any case, the message here is that investors should be prepared for disappointments in future quarterly reports.

(Source:Portfolio123*)

The average recommendation for LKQ is 2.1 on a scale of 1 to 5 with 1 being a 'Buy' and 5 being a 'Sell' which is an average rating for the distributors industry. For example, GPC has an average recommendation of 3.0, while POOL has an average recommendation of 2.0.

(Source:Portfolio123*)

The stock short interest is at 1.5% of float, down from ~2.5% a few months ago. 1.5% short interest is a little better than average for the distributors industry.

Technicals

On the daily chart, the stock price is on a downward trend after meeting resistance at $30.6.

(Source: stockcharts.com)

On the weekly chart, the stock price has been falling from a high of $36 in September 2016 to a recent price of $29.65, near a support level. We must wait to see if the support level holds although it appears unlikely. The next support level is at ~$24.75, a 20% drop from the current price.

Investing in LKQ

Overall, I am slightly-bearish on LKQ based on the following:

  • Inconsistent quarterly results that have been missing expectations recently
  • Higher debt/equity than the industry average in an environment of rising interest rates
  • The majority of revenue and profit growth is coming via company acquisition in Europe. The high level of debt will make future acquisitions more difficult.
  • The stock price has a downward trend and the trend may continue for some time.

I suggest that LKQ be avoided for the short term. Wait for the stock price to form a base before reevaluating the company.

Wrap-Up

The last year has been a bumpy ride for LKQ shareholders, down 3% and underperforming the GICS Distributors subindustry by 6%. Both revenues and profits have been steadily increasing for several quarters as the company expands its European presence, primarily through acquisition. Sales and EPS have missed analysts' estimates on several occasions, meaning that the company is either providing optimistic forward guidance or is having difficulties forecasting company performance. The stock price is on a downward trend after meeting resistance at $30.6. The price is sitting near a support level which may not hold. I suggest waiting for a base to form then reevaluating the fundamentals before deciding whether or not to buy LKQ.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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