LKQ Hopes to Overcome Higher Expenses
Auto parts are big business, and when it comes to specialty and custom parts, few suppliers match up to LKQ (NASDAQ: LKQ). With its emphasis on higher-margin products in the space, LKQ not only boosts potential profit but also builds a reputation among auto aficionados who are willing to spend up for high-quality parts.
Coming into Thursday's third-quarter financial report, however, LKQ investors were a bit concerned about the cost pressures that have shown up in the company's financials lately. LKQ once again warned that those pressures show no signs of abating, and it cut its guidance for the remainder of the year. Yet investors seemed to be comfortable with those moves and didn't flinch at the results.
Image source: LKQ.
How LKQ did
LKQ's third-quarter results were generally in line with the company's recent performance. Revenue jumped 27% to $3.12 billion, which almost exactly matched the consensus forecast among those following the stock. Adjusted income from continuing operations grew 27% to $177 million, and that produced adjusted earnings of $0.56 per share, the same as what investors had expected.
Most of the gains that LKQ posted came from recent acquisitions. Organic revenue growth in the parts and services business amounted to 4.3%, with acquisitions accounting for 23 percentage points of the overall top-line rise. Currency impacts weren't particularly significant in moving LKQ's results.
Looking at LKQ's segments, the small specialty division had the best-balanced performance. Organic growth of 8% led the company's parts and services offerings, and acquisitions added another 10 percentage points to top-line gains. LKQ's European division saw the biggest impact from acquisitions, getting almost all of its 54% revenue gains from non-organic sources. Organic growth in Europe was just 2%, the slowest in the company. North American growth came almost solely from organic sources, where LKQ posted a 5.2% gain. Segment profit figures followed the same pattern, although a hit to margin levels in North America limited bottom-line gains to just 1%.
LKQ's other-business segment made a small but significant positive contribution to its results. Despite bringing in only about 5% of revenue, 25% top-line growth represented about 1.5 percentage points of the company's total growth.
Can LKQ keep growing?
CEO Dominick Zarcone had some things to say about LKQ's results. "I am pleased with the trajectory of our operational initiatives," Zarcone said, "that are focused on a more balanced approach of delivering organic growth while simultaneously optimizing productivity and profitability." The CEO also noted that seasonal declines in profit margin figures in the North American market were less dramatic than in past years, but he pointed to "the ongoing headwinds of wage and freight inflation" as potentially problematic going forward.
Because of those cost pressures, LKQ again reduced its guidance for the year. Organic growth should be between 4.5% and 5%, narrowing to the lower half of its previous range, and adjusted earnings of $2.19 to $2.25 per share would be $0.06 to $0.08 per share less than what LKQ had projected three months ago. CFO Varun Laroyia put the move in context, noting that "while the initial results of our actions are positive, we believe that these cost pressures will not abate in the near term and have adjusted our guidance to address the economic headwinds related to freight, fuel and wage inflation and declining scrap prices."
Yet LKQ did express confidence in its stock. The company said it would spend up to $500 million toward share repurchases, with the intent of taking advantage of opportunities that could come up between now and October 2021 to pick up stock at a bargain price. Representing about 6% of LKQ's current market cap, the commitment is significant.
LKQ shareholders seemed relatively comfortable with the news despite the company's concerns, and the stock was higher by 4% near midday following the announcement. Nevertheless, if LKQ really wants to regain more of the ground it's lost recently, it needs to find a better long-term solution to answer the higher expenses it could have to bear for a long time.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends LKQ. The Motley Fool has a disclosure policy.
