While the finally acknowledged U.S. economic recession has several companies scrambling to stay afloat, automobile-parts recycler LKQ Corp. (LKQX) has delivered consistent earnings growth exceeding 40% in the last five years. Even as the downward spiral in the U.S. auto industry accelerates across the rest of the globe, the company sported a revenue growth of over 100% in the most recent third quarter. LKQ, as a seller of used auto-parts, seems better positioned to navigate the U.S. auto malaise than many other auto-parts suppliers that have either posted hefty losses, gone out of business or declared bankruptcy.
The rationale driving LKQ's growth is actually simple. Credit crunch or recession, people need to maintain their vehicles in good condition, replace or repair parts if needed, especially when forced to delay new vehicle purchases. Tough times compel people to look for the cheapest repair options available and LKQ, which offers customers cost-effective solutions to fix vehicles, seems like a godsend. The company sells used replacement products needed to repair cars and light trucks that are classified as light vehicles. From February this year, the company has expanded into the heavy trucks turf.
While replacing parts in a vehicle, people have the choice to buy
-- New products from original equipment manufacturers or OEMs known as OEM products
-- New products produced by companies other than the OEMs, referred to as ''aftermarket'' products
-- Recycled or used products originally produced by OEMs, referred to as recycled OEM products and
-- Refurbished OEM products
LKQ profiles itself as a one-stop solution for recycled OEM parts, aftermarket replacement parts, and refinished wheels and bumper covers.
Simply put, the company buys a 'totaled' car, dismantles it and resells the reusable components. Procuring wrecked vehicles, primarily at auctions, the company salvages reusable parts including engines, front-end assemblies, doors, and fenders and sells such parts to collision repair shops also known as body shops, and mechanical repair shops. Additionally, the company plays a major role in the collision repair aftermarket products market and also refurbishes and sells bumpers, wheels, headlamps and tail lamps.
The usage of recycled OEM parts leads to attractive savings of between 20% and 50% for the user. The value proposition stemming from using recycled parts has triggered an industry shift toward alternative components, which are usually the lowest-cost choices. About 30 years ago, the mechanical replacement parts market comprised approximately 80% new OEM products and 20% alternative parts, but the trend has reversed. Alternative parts now account for nearly 80% of the market, and new OEM products the rest.
The transition is more gradual in the collision replacement parts landscape, where alternative collision replacement parts take about 1% of market share annually from new OEM products. Alternative products represented 31% of the collision replacement parts market in 2007, up from 22.8% in 2000. The potential for alternative collision replacement parts is expected to mirror the shift in the more-mature mechanical replacement parts market. LKQ, which operates approximately 300 facilities nationwide, is well positioned to benefit from the industry transition.
Since its inception in 1998, the company has pursued a strategy of growing organically and through acquisitions. In the last decade, the company has completed more than 60 acquisitions. The acquisition of Keystone Automotive Industries in October 2007 bumped up the company's footprint significantly in the market for collision repair aftermarket products. With the Keystone acquisition, the company now claims to be the largest nationwide provider of aftermarket collision replacement products and refurbished bumpers and wheels. Before Keystone, aftermarket was a much smaller operation for the company.
Keystone has helped boost the company's aftermarket revenues in Q1, Q2 and Q3. Aftermarket, other new and refurbished products fetched revenues of $230.3 million in the recent third-quarter ended Sep 30, a four-fold increase from $57.75 million in the year-ago period, at which time Keystone had not been part of LKQ. Revenues from such products totaled $746.6 million in the first nine months of 2008, up four-fold from $179.8 in the previous year. The company says it is on track to realize anticipated savings of $35 million or more by 2010, from the integration of Keystone.
In the latest third quarter, LKQ completed the acquisition of Pick-Your-Part Auto Wrecking, an auto recycler with nine locations in California and 2007 revenues of about $114 million.
More recent acquisitions include two heavy-duty truck recycled parts businesses with combined annual revenue of about $20 million. These businesses along with previously acquired recycled heavy-duty truck parts operations during 2008 have facilitated the company's debut into a complimentary segment - heavy-duty trucks.
Until February last year, the company was selling only light vehicle parts. The company says the trucking industry faces significant cost pressures because of changing fuel and emission standards and estimates the heavy-duty trucks recycled part market in excess of $1 billion.
Since 2005, the company has generated between 81% and 89% of revenues from the sale of vehicle replacement products and related services. Revenue has grown at a 36% Compounded Annual Growth Rate or CAGR from $328 million in 2003 to $1.13 billion in 2007 and earnings at a CAGR of 29% from $0.20/share to $0.55/share.
For the most recent third quarter, revenues rose 102% to $490.7 million from $243.5 million last year. Including restructuring expenses of $2.4 million related to the company's Keystone acquisition in October 2007, net income rose 72.2% to $25.1 million from $14.6 million and earnings to $0.18/share from $0.13/share. Earnings Per Share however missed estimates by a penny, after beating estimates by an average 26% in the previous three quarters.
The consistent financial performance in a turbulent economy is supported by a well-orchestrated procurement process that is critical to the company's growth, inventory procurement being the company's largest single expenditure. While buying wrecked vehicles, primarily at salvage auctions, the company focuses on vehicles for which the insured repair market has the most demand for recycled OEM products. Although collision and mechanical repair shops are the core customers, the company indirectly relies on insurance companies, which ultimately pay the collision repair shops for the repair of any insured vehicle.
Ahead of each auction, the company sends a scout to investigate the vehicles it may be interested in buying. The scout obtains key information such as the model, mileage, and damage assessment and determines which parts on the targeted vehicles are recyclable. This information is then electronically forwarded to the company's bid specialists via handheld computing devices. The bid specialists analyze the data in light of present demand for the parts in question, the levels of inventory with respect to such parts, and the projected margins expected for each vehicle. The specialists then set a maximum bid price for the vehicle in order to achieve its target margins on resale of the products. The company's bidders use the bid price to purchase the vehicle at auction.
Attempts are then made to maximize revenue generation from the procured inventory. Every recyclable component is dismantled and sold, and this generally includes engine, transmission, hood, trunk lid, head and tail lamp assemblies, rear bumper, and doors. Even items like fluids, Freon, batteries, tires, and catalytic converters that can be recycled are sold to recyclers and reprocessors. Mechanical products not in a condition to be sold as recycled products are sold in bulk to parts re-manufacturers. The remaining vehicle hulks and components, such as fabrics, rubber, plastics, and glass, are sold to scrap processors.
This disciplined approach has taken the company beyond the "junk yard" image that is usually associated with recyclers. Combining this with the value proposition stemming from product costs lower than new OEM products, product warranties, quick delivery of products and extensive product availability ensured by the company's nationwide footprint -- the resultant image can be compelling. The wide distribution network helps the company achieve fulfillment rates -- or the ability to fulfill customer orders -- of 65% for recycled OEM products, above the industry average of 40-50%.
During the third quarter, the company launched "Key list", its first automated parts estimate review program that takes any estimate review written by either an insurance estimator or a repair shop and notifies the user within 30 seconds about the recycled or aftermarket parts that can be used to repair the vehicle. The company says it has already signed up one of the top 10 insurance carriers to use this product.
There is no manufacturing involved as parts are only recycled and distributed. Coupling this with initiatives to squeeze every penny out of the wrecked vehicles is perhaps what contributes to the company's industry-leading margins. Gross margin in the trailing twelve months is 35.70%, higher than the industry's 32.97%, while operating margin for the same period is 11.95%, compared to the industry's negative 1.76%.
Not everything is as rosy as it seems. While the company is more resilient than most auto parts suppliers, it is certainly not immune. Recently, the company cut its full-year outlook to reflect the economic downturn, the headwinds being fewer insurance claims and more specifically the sharp decline in scrap metal and commodity prices. In its Q3 earnings press release, LKQ said the recycled business continues to see steady growth, but the growth of aftermarket sales is being constrained by current economic realities.
After market products usually fix cosmetic damages to a car. Even after such damages, the car is still in driving condition. Hence, many delay buying after market products during downturns. The company's most popular aftermarket products include headlamps, tail lamps, grilles, hoods, mirrors, bumpers, bumper covers, and fenders. The main culprit for pulling down annual guidance is however the steep decline in Steel scarp prices, the company said in its Q3 earnings conference call.
LKQ now sees full-year earnings between $107 million and $114 million, or between 76 cents and 81 cents per share. Prior projections were for earnings of between $120 million and $124 million, or 85 cents and 88 cents per share. The latest outlook represents a 38% to 47% increase from earnings per share in 2007 and is still higher than the original expectations of $0.73-$0.77 per share provided in February. Analysts are currently looking for 77 cents/share.
After trading in a narrow range of $10 to $12 for a year and a half, shares of LKQ broke out with increased volume in July of 2007, subsequent to the company's stellar Q2 results. The breakout sparked a rally that saw the stock gain better than 100% and set an all time high of $25 in late March of 2008. Thereafter, the stock traded sideways and attempted to hold a key support level around $17 several times, but finally fell below support in early October, retreating sharply with the broader markets. The stock reached a 52-week intra-day low of $8.70 in November and bounced off the lower end of the 2006-2007 trading range support level. After retesting the November low again in early December, the stock has been trending up and has gained about 26% and closed Wednesday's session at $10.98. Also, the stock saw the highest volume in the company's short 5-year trading history on Dec 22, following Standard & Poor's announcement on Dec 18 to move LKQ to the S&P MidCap 400 from the SmallCap 600.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.