Vehicle Repair Demand Continues to Strengthen, Benefiting LKQ’s Q1 Results

Business Strategy & Outlook

LKQ is the top alternative vehicle-parts provider to repair shops in North America and Europe. The company has built scale-driven cost advantages in its business. Customers value LKQ’s consistent parts availability across a wide range of products and quick delivery. LKQ helps customers complete repairs faster, boosting productivity. The company’s strong distribution network will support its ability to keep order fulfilment rates high in both aftermarket and salvage products.

The company’s strategy focuses on being a one-stop shop for repair professionals, ranging from salvage products to aftermarket and remanufactured parts. LKQ’s parts are a strong alternative to original equipment manufacturers’ parts, exhibiting high quality in comparison. While insurance companies aren’t usually direct customers, they do have sway over which parts are used in vehicle repairs. LKQ’s alternative parts allows insurance companies to reduce their cost base while also reducing the cycle time for repairs. Historically, the company has used acquisitions to build up its capabilities and footprint, but that has changed over the past few years. LKQ has shifted its focus to integrating its businesses and improving its cost structure, and it will aim to make smaller tuck-in acquisitions as opposed to larger deals.

LKQ is well positioned to compete as electric vehicle adoption increases. The shift to EVs will present new revenue opportunities for the company. In both hybrid and full-electric vehicles, new parts will be needed to keep vehicles on the road. For example, to see increased demand for battery-related parts and a need for remanufactured or refurbished batteries.

LKQ has exposure to end markets with attractive tailwinds. The demand for repair work will be strong in the near term, largely due to vehicle owners taking in their cars for overdue servicing (delayed by the COVID-19 pandemic). The high average age of vehicles will also support demand for repair work.

Financial Strengths

LKQ maintains a sound balance sheet. Its debt balance stood at $2.8 billion in 2021, down from $3.7 billion in 2019. LKQ’s management team has been focused on strengthening the balance sheet over the past few years. The company’s net leverage position (net debt/EBITDA) has steadily improved, declining from nearly 3 times to under 2 times in 2021. This resulted in LKQ reaching investment-grade status.

In terms of liquidity, the company will be on solid footing over the long term. In 2021, LKQ had a cash balance of nearly $300 million, but this will likely increase over the forecast, given the company’s shift in its acquisition strategy. In the past, LKQ was more willing to acquire companies to expand its capabilities and footprint. Going forward, the company will focus on small tuck-ins, freeing up more cash to reinvest in its business, repurchase shares and grow its dividend. A stronger cash position will help LKQ quickly react to a changing operating environment as well as meet any near-term debt obligations (no major maturities until 2024). The comfort in LKQ’s ability to access $1.2 billion in credit facilities. LKQ’s solid balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favours organic growth and also returns cash to shareholders.

LKQ can generate solid free cash flow throughout the economic cycle. The company to generate over $1 billion in free cash flow in midcycle year, supporting its ability to return free cash flow to shareholders through share repurchases and dividends. Additionally, free cash flow growth over the next decade will be supported by improving EBITDA margins in LKQ’s Europe business, which to be in the low-double-digit range over the next five years.

Bulls Say

Growth in miles driven increases the wear and tear on vehicles, requiring more maintenance and repair work to keep them on the road, benefiting LKQ.

LKQ’s collision business could see rising demand from increasing auto claims as more drivers return to the road following the COVID-19 pandemic.

Increasing adoption of hybrid vehicles presents new revenue opportunities for LKQ, such as new battery related parts, in addition to its ICE-related parts.

Company Description

LKQ is a leading 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 parts for resale. Globally, LKQ maintains approximately 1,700 facilities.

(Source: Morningstar)

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