We recently compiled a list of the 8 Best Car Repair Stocks to Invest In. In this article, we are going to take a look at where LKQ Corporation (NASDAQ:LKQ) stands against the other car repair stocks.
An Overview of the Global Automotive Aftermarket Industry
According to a report by Fortune Business Insights, the global automotive aftermarket industry was valued at $418.95 billion in 2023. The market is expected to reach $568.19 billion by 2032. The acceptance of electric and hybrid vehicles is expected to propel the growth in demand for related aftermarket products. Moreover, the rise in automotive e-commerce is also contributing to increased sales in the market. As a result, major players in the industry are developing their omnichannel platforms to facilitate online automotive aftermarket services.
The KPMG Corporate Finance recently released its automotive aftermarket report for the fiscal third quarter of 2024. The report highlights that the decline in new car purchases can lead to growth for the aftermarket industry. Despite the recent cut in the Federal Reserve’s interest rates, experts believe new car purchases may not see an immediate uptick. This is because auto loan interest rates typically adjust slowly, thereby remaining high even after the Fed’s actions. Currently, average auto loan rates are still exceeding 9.61% for new vehicles and nearly 14% for used vehicles, which poses a significant barrier to new car purchases. As a result, many consumers are opting to defer vehicle purchases and are increasingly relying on the aftermarket for more affordable maintenance and repair solutions to extend the lifespan of their existing vehicles.
Moreover, the gradual adoption of battery-electric vehicles (BEVs) and software-defined vehicles is reshaping the automotive aftermarket landscape. While these advancements may lead to less frequent maintenance needs, they also introduce new service requirements related to battery systems and advanced electronics. According to forecasts from Bank of America Global Research, BEVs are expected to comprise about 8% of total vehicle sales in 2024, increasing to approximately 29% by 2030.
While analyzing the performance of the industry during the quarter, the report highlighted that the S&P 500 Index and Dow Jones Industrial Average (DJIA) saw significant growth over the past year, up 34.4% and 26.6%, respectively. The Automotive Aftermarket Index grew at a slower pace of 14.3%. However, it is noteworthy that in Q3 2024, this index outperformed both major indices with a growth rate of 8.4%. Specific segments within the aftermarket showed varied performance. For instance, the Parts Suppliers grew by 13.1% while Retailers & Distributors grew by 8.9%. The Enthusiast Products segment rebounded with an 11.3% increase after earlier declines, whereas Service Providers experienced a slight decline of 3.2%.
Regardless of the challenges stemming from high interest rates and inflation the automotive aftermarket has shown resilience and proved to be recession-proof. The shift towards maintaining older vehicles rather than purchasing new ones, combined with technological advancements in vehicle types is fueling growth in the industry. Moreover, trends suggest that while immediate growth in new car sales may be sluggish, there remains a robust demand for aftermarket services and products as consumers adapt to changing economic conditions.
Our Methodology
To curate the list of 8 best car repair stocks to invest in, we used the Finviz stock screener and other listings on the internet. Using our sources we aggregated a list of car repair stocks sorted by market capitalization. Next, we ranked these stocks by the number of hedge fund holders sourced from Insider Monkey’s third-quarter hedge funds database.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A worker in a factory using a robotic arm to assemble automotive body panels.
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.”
Overall LKQ ranks 4th on our list of the car repair stocks to invest in. While we acknowledge the potential of LKQ as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than LKQ but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.