6. LKQ Corporation (NASDAQ:LKQ)
Market cap as of November 7: $9.91 Billion
Number of Hedge Fund Holders: 31
LKQ Corporation (NASDAQ:LKQ) produces and recycles alternative and specialty parts of the auto industry. It distributes bumper covers, automotive body panels, lights, mechanical automotive parts, and accessories. While the stock is down by about 20% for the year, it remains one of the best recycling stocks to buy, going by the impressive financial results.
Its revenue in the third quarter, as reported on October 24, 2024, was up 0.5% year over year to $3.6 billion. Adjusted net income in the quarter totalled $230 million compared to $231 million in the same quarter last year. The company exited the quarter with $661 million in free cash flow, returning $200 million to shareholders by investing $125 million in stock repurchases and $79 million in cash dividends.
LKQ Corporation (NASDAQ:LKQ) also announced a strategic divestment of its subsidiary Elit Polska. This action aligns with the business’s plan to simplify its asset base. Additionally, LKQ and the German trade union Verdi have successfully reached a collective bargaining agreement to benefit approximately 5,000 of LKQ’s German workers.
While trading at a discount with a price-to-earnings multiple of 10, LKQ Corporation (NASDAQ:LKQ) is one of the best recycling stocks, as it has a 3.25% dividend yield, which is ideal for generating passive income. Additionally, the board has authorized a $1 billion increase in the stock repurchase program, raising the aggregate authorization to $4.5 billion which should allow it to return more value.
Artisan Partners’ Artisan Mid Cap Value Fund stated the following regarding LKQ Corporation (NASDAQ:LKQ) in its Q2 2024 investor letter:
“In the health care and consumer discretionary sectors, Baxter International and LKQ Corporation (NASDAQ:LKQ) were key detractors. LKQ is the dominant player in salvage/aftermarket collision parts distribution in North America, with over 70% market share. In addition to continued cost inflation, lower-than-expected collision claims in North America due partly to a mild winter resulted in disappointing quarterly earnings. What was already a cheap stock when we initiated our position in January of this year has become even cheaper. At a 10X P/E, shares trade at a distinct discount to their historical 10-year average of 14X and are also cheaper relative to LKQ’s auto parts retailer peers, which arguably have similar long-term growth profiles. LKQ isn’t a fast-growing business, but it can grow 2% to 4%, and given its dominant market share and mid-teens return on tangible capital, we believe it should trade at a higher valuation. Over the last decade, LKQ has also become the largest mechanical parts distributor in Europe. As is the case in North America, independent European mechanics value LKQ’s reliable distribution and competitive pricing. The European business has improved operationally over the last five years as LKQ has focused on the integration of its various acquisitions to drive margin and free cash flow improvements. LKQ operates in end markets with limited cyclicality as 90% of revenues are tied to non-discretionary spending and reliably has strong free cash flow generation. The company also meets our requirement for a sound financial condition as its debt load is manageable at 2X EBITDA due to its attractive free cash flow. We added to our position on weakness.”
