LKQ Corporation (LKQ)’s Potential, and Advance Auto Parts, Inc. (AAP)

Pep Boys derived slightly more than half of its fiscal 2012 revenue from the Service segment while the Do-It-Yourself segment accounted for less than 40% of revenue. This sales mix with a higher proportion of sales from the Service segment puts The Pep Boys in a good position to benefit from the trend of consumers shifting away from Do-It-Yourself as a result of the increasing complexity of cars. Furthermore, the Service market is perceived as more protected with barriers to entry in the form of high capital outlay and technical expertise.

LKQ Corporation (NASDAQ:LKQ) is valued at a premium to its peers with a forward P/E of 19.2. In comparison, Advance Auto Parts, Inc. (NYSE:AAP) and The Pep Boys are valued by the market at 14 and 16.6 times forward P/E. Using the PEG ratio shows a slightly different picture, with LKQ valued at a discount to its peers with a PEG of 1.2. Comparatively, Advance Auto Parts, Inc. (NYSE:AAP) and The Pep Boys trade at a similar 1.4 times PEG.

Conclusion

LKQ is a quality company which leverages on its wide distribution network and relationships with insurance carriers to sell its products. Despite being cheap relative to its peers, LKQ Corporation (NASDAQ:LKQ) is still overvalued on an absolute basis with a PEG of 1.2. I will advise investors to consider buying this stock at a lower entry price.

The article An Expensive Stock Selling Cheaper Alternative Products originally appeared on Fool.com.

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