Mr Wallstreet Weekly Stock Report Featuring LQK

• 02/13/2019
  
• Company name: LKQ Corporation (LKQ)
  
• Head Quarters: Chicago, IL founded in 1998
  
• www.lkqcorp.com
  
• Current stock Price: $26.70
  
• Dividend Yield: No dividend
  
• Z- Score: 2.72 just under the safe zone
  
• F-Score: 5 safe
  
• If you ever got into an accident or have ever taken your vehicle in for service, you probably have indirectly used parts from LKQ. I recently got into a chicken match while in my car against a deer. The deer won. I came home with my whole headlight assembly destroyed. I tried to call the local shops like auto zone, pep-boys, advance auto and none of them had the whole assembly ready for pick up. I needed the car before an out of town trip. LKQ had the part and the design I needed for my particular car in stock. LKQ is like a giant organized junk yard with used and new parts. LKQ operations in three major segments, auto collision parts from supplying to recycling, self-service retail operations, and design, manufacture, and market vehicle equipment and accessories. I wanted to look further into this company and found out it was publicly traded under the ticker symbol LKQ.
  
• LKQ is in the auto parts industry. It is a leading provider of alternative and speacialty parts to repair and accessorize vehicles. LKQ has operations in North America, Europe, and Taiwan. LQK offers its customers a broad range of replacement systems, components, equipment and auto parts to repair and accessorize automobiles, trucks, and recreational and performance vehicles.
  
• Some of the top competitors in the auto parts industry are:
  
• 1. Johnson Controls International (JCI)- diversified technology and multi industrial worldwide company.
     
• 1. Magna International Inc (MGA)- designs, develops, and manufactures automotive systems, assemblies, modules, and components.
     
• 1. Lear Corporation (LEA)- designs, develops, engineers, manufactures, assembles, and supplies automotive seating and electrical distributions systems and related components to automotive original equipment manufactures worldwide.
     
• LKQ is good for society because it is the largest recycler of automobiles in the world, recycling 95% of the materials from end-of-life vehicles. It has a minimal footprint on the environment and is committed to protecting the environment. LQK takes care of their employees by having their own health and safety department continuously monitor working conditions. They also created their own community foundation that provides disaster relief and hardship assistance to employees and their families who suffer unexpected tragedies. They also provide a scholarship fund for children of employees. Last but not least of serving society, LKQ donates time and material for local fire and police departments to conduct training, allowing local law enforcement to utilize facilities to learn, teach, and apply first responders’ techniques and methods to real-life situations. LQK works with local community colleges and job training programs to teach people the skills necessary to repair vehicles.
  
• The main advantage LKQ has is having a brand name, priority inventory tracking system, and niche of fragmented markets. I believe as long as vehicles get into accidents and break down LKQ will be around for the next decade.
  
• Since I think it will be around forever, now let’s take a look at some of the growth rates to see if it worth investing in. To do this I like to take a look at the past five year history and last year growth rate.
  
• Book Value (BVPS): 16 and 21%
  
• Earning (EPS): 15 and 15%
  
• Operation Cash (OCPS) 20 and -18% (acquired three business in the 3rd quarter of 2018)
  
• Sales: 20 and 13%
  
• President, CEO, and Director Dominick P. Zarcone has been the CEO since 2017. He serves as director of LKQ corporation, Coastal Distribution Systems Inc, and Generac Holding Inc. He was the Chief Financial Officer and Executive Vice President of LKQ from March 30, 2015 until May of 2017. Before joining LKQ, he served as Managing Director and Chief Financial Officer of Baird Financial Group which took the company public in 2003. I am unsure if I am willing to trust Zarcone with my money. He still needs to prove himself with LKQ. Prior management has done a good job with Return on Invested Captial (ROIC) has been consistency over 12% for the last 10 years.
  
• Some risks that I am concerned with:
  
• 1. New CEO Dominick P. Zarcone, I like to invest in CEOs with proven long-term track records. The prior CEO Rob Wagman been with the company for over 18 years and has stepped down due to health reasons. Wagman plans on keeping a role in the company and assist Zarcone with the transition.
     
• 1. Price increases of scrap steel may have an unfavorable impact on their recycling program.
     
• 1. Cost of vehicles in their service salvage operations has been increasing 4% year over year.
     
• 1. The acquisitions of three companies gave them a debt that can’t be paid off with cash flow within three years. However, these companies should create a synergy and their effective borrowing rate for Q3 was 3.5% and 80% of the outstanding debt is at a fixed rate.
     
• How much would I pay for this company today?
  
• Due to the recent debt of the company and past growth rates I would use a conservative earnings growth rate of 10%, for the last ten years the earnings growth has never been below 11.8%.
  
• At today’s trailing twelve month Earning Per Share (EPS) of 1.80 at a growth of 10% in 5 years would be at $2.89. And a historical Price to Earnings (PE) ration of 14.46. Multiplying these numbers 14.46 x $2.89, I get a future five-year price of $41.78. At todays price of $26.70 that gives you an 8% return a year.
  
• As of right now, I would wait to purchase the stock. I think I could do better than 8% but I will continue to watch the stock for a better opportunity. Also, LKQ doesn’t pay a dividend for waiting.
  

Mr-Wallstreet