LKQ Stock Study (6-3-24)

I recently did a stock study on LKQ Corp. (LKQ) with a closing price of $43.03.

M* writes:

     > LKQ is a Global distributor of non-OEM automotive parts. Initially
     > formed in 1998 as a consolidator of auto salvage operations in the
     > United States, it has since greatly expanded its scope to include
     > distribution of new mechanical and collision parts, specialty auto
     > equipment, and remanufactured and recycled parts in both Europe
     > and North America. It still maintains its auto salvage business and
     > owns over 70 LKQ pick-your-part junkyards. Separate from the self-
     > service business, LKQ purchases over 300,000 salvage automobiles
     > annually that are used to extract vehicle parts for resale. Globally,
     > the company maintains approximately 1,700 facilities.

Over the last 10 years, this large-size company has grown sales and EPS at annualized rates of 8.3% and 14.4%, respectively. Lines are somewhat up and parallel except for sales dips in ’20 and ’22 along with EPS dips in ’18 and ’23.

Over the last decade, PTPM edges out peer and industry averages while ranging from 6.3% in ’18-’19 to 11.9% in ’22 with a last-5-year mean of 9.1%. ROE trails peer and industry averages by ranging from 10.1% in ’18 to 20.9% in ’22 with a last-5-year mean of 15.5%. Debt-to-Capital is generally higher than peer and industry averages while ranging from 33.7% in ’15 to 51.9% in ’19 with a last-5-year mean of 45.4%.

M* reports Quick Ratio of 0.6 and Interest Coverage of 5.6: both of which have trended lower over the years. Value Line gives an “A” rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 8.9% and 3.9% for ’24 and ’25, respectively (based on 8 analysts).
• Zacks projects YOY 8.8% and 4.1% for ’24 and ’25, respectively (7 analysts).
• Value Line projects 6.5% annualized growth from ’23-’28.
• CFRA projects 9.5% YOY and 6.6% per year for ’24 and ’23-’25, respectively.
• M* offers a 2-year ACE of 6.8% per year.

My forecast is near the bottom of the range at 6.0%.

With regard to EPS growth:

• MarketWatch projects 9.1% and 7.7% per year for ’23-’25 and ’23-’26, respectively (based on 11 analysts).
• Nasdaq.com projects 12.0% YOY and 9.1% per year for ’25 and ’24-’26 [7, 7, and 2 analyst(s) for ’24, ’25, and ’26].
• YF projects YOY 2.3% and 11.2% for ’24 and ’25, respectively (8), along with 5-year annualized growth of 33.5%.
• Zacks projects YOY 2.6% and 12.0% for ’24 and ’25, respectively (7).
• Value Line projects 6.9% annualized growth from ’23-’28.
• CFRA projects 1.6% YOY and 4.7% per year for ’24 and ’23-’25 along with a 3-year CAGR of 5.0%.
• M* projects long-term annualized growth of 7.0%.

My 6.0% per year forecast is below the long-term-estimate range. Although the mean of three estimates is 15.8%, YF seems like an upside outlier. Initial value is ’23 EPS of $3.52/share rather than 2024 Q1 EPS of $3.10 (annualized).

My Forecast High P/E is 14.0. Over the past 10 years, high P/E trends down from 26.3 (’14) to 16.9 (’23) with a last-5-year mean of 17.4 and a last-5-year-mean average P/E of 13.8. I am below the range.

My Forecast Low P/E is 11.0. Over the past 10 years, low P/E trends down from 19.6 (’14) to 11.8 (’23) with a last-5-year mean (excluding 6.3 outlier in 2020) of 11.1. I am near the bottom of the range [’20, ’21 (9.3), and ’22 (10.3) are lower].

My Low Stock Price Forecast (LSPF) of $34.10 is default based on initial value given above. This is 20.8% less than the previous close and 17.4% less than the 52-week low.

Since dividend inception in 2021, Payout Ratio (PR) increases from 6.8% to 32.0%. I am forecasting below the range at 6.0%.

These inputs land LKQ in the HOLD zone with a U/D ratio of 2.6. Total Annualized Return (TAR) is 9.3%.

PAR (using Forecast Average—not High—P/E) of 7.0% is less than I seek for a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 101 studies in the past 90 days (my study and 27 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 6.7%, 7.0%, 17.1, 10.1, and 16.2%, respectively. I am lower on all but the fourth (11.0). Value Line projects future average annual P/E of 16.0: greater than MS (13.6) and greater than mine (12.5).

MS high / low EPS are $4.72 / $3.34 versus my $4.71 / $3.10 (per share). My initial value is lower. Value Line’s high EPS of $5.35 exceeds both.

MS LSPF of $35.20 implies a Forecast Low P/E of 10.5 versus the above-stated 10.1. MS LSPF is 4.4% greater than the default $3.34/share * 10.1 = $33.73, which results in more aggressive zoning. MS LSPF also 3.2% greater than mine.

TAR is less than MS 13.1%. MOS is robust in the current study especially if one believes YF’s long-term estimate.

With regard to valuation, PEG is 2.2 per my projected P/E: a bit expensive. Relative Value [(current P/E) / 5-year-mean average P/E] is fair at 1.01.

LKQ is a BUY under $34/share. All other things being equal, that will also come close to satisfying the 15% TAR criterion based on my forecast high price ~$66.