LKQ trades at $32.86 per share and has stayed right on track with the overall market, gaining 11.3% over the last six months. At the same time, the S&P 500 has returned 10%.
Is there a buying opportunity in LKQ, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think LKQ Will Underperform?
We're sitting this one out for now. Here are three reasons there are better opportunities than LKQ and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Specialized Consumer Services companies by analyzing their organic revenue. This metric gives visibility into LKQ’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, LKQ’s organic revenue averaged 2.1% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests LKQ might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Free Cash Flow Projections Disappoint
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting LKQ’s free cash flow margin of 5.2% for the last 12 months to remain the same.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, LKQ’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of LKQ, we’ll be cheering from the sidelines. That said, the stock currently trades at 10.3× forward P/E (or $32.86 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Like More Than LKQ
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