4. LKQ Corporation (NASDAQ:LKQ)
Number of Hedge Fund Holders: 36
LKQ Corporation (NASDAQ:LKQ) specializes in distributing vehicle products. It supplies various types of vehicle parts that can replace damaged or worn-out components including aftermarket parts, OEM parts, and recycled parts. The company operates through Wholesale-North America, Europe, Speciality, and Self Service segments.
The company is focusing on simplifying its operations to improve returns. Recently, it sold its operations in Poland and Bosnia, which were deemed loss-making, allowing management to concentrate on more profitable areas. It is also actively reviewing its cost structures across all businesses to enhance efficiency. This includes closing underperforming locations and rationalizing product offerings in Europe. Despite these initiatives, LKQ Corporation (NASDAQ:LKQ) faced challenges in revenue growth. Its Parts and services revenue declined by approximately 4% on a per-day basis, with North America experiencing a decline of 7.5%.
However, regardless of the softness, management was able to grow its fiscal third quarter revenue by 0.5% year-over-year to reach $3.6 billion. Its adjusted net income for the quarter declined slightly from $231 million in Q3 2023 to $230 million in the latest quarter. Management ended the quarter with $661 million in free cash flow. Artisan Mid Cap Value Fund in its second-quarter investor letter noted that LKQ Corporation (NASDAQ:LKQ) might not be the fastest-growing business among its peers, however, it has gained investor attention by becoming the largest mechanical parts distributor in Europe. This gives the company a significant strategic edge making it one of the best car repair stocks to invest in.
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.”
