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LKQ Corporation Valuation – Initial Coverage $LKQ

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how LKQ Corporation (LKQ) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): LKQ Corporation (LKQ) is a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, as well as specialty vehicle products and accessories. The company distributes a range of products to collision and mechanical repair shops, including aftermarket collision and mechanical products, and recycled collision and mechanical products. It operates through four segments: Wholesale – North America; Europe; Specialty, and Self Service. Its wholesale automobile product operations sell five product types (aftermarket, recycled, remanufactured, refurbished and original equipment manufacturers (OEMs) parts). The European wholesale operating segment includes Euro Car Parts Holdings Limited (ECP). The Specialty operating segment includes Keystone Automotive Holdings, Inc. (Keystone Specialty). The Company’s self service segment retail operations sell parts from older cars and light-duty trucks directly to consumers.

LKQ Chart

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Downloadable PDF version of this valuation:

ModernGraham Valuation of LKQ – March 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $9,972,124,064 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.95 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 239.13% Pass
6. Moderate PEmg Ratio PEmg < 20 21.02 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.86 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.95 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.39 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $1.51
MG Growth Estimate 12.60%
MG Value $50.91
Opinion Undervalued
MG Grade D+
MG Value based on 3% Growth $21.90
MG Value based on 0% Growth $12.84
Market Implied Growth Rate 6.26%
Current Price $31.75
% of Intrinsic Value 62.36%

LKQ Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $0.82 in 2013 to an estimated $1.51 for 2017. This level of demonstrated earnings growth outpaces the market’s implied estimate of 6.26% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into LKQ Corporation revealed the company was trading above its Graham Number of $21.29. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 21.02, which was above the industry average of 18.47. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-4.17.

LKQ Corporation scores quite poorly in the ModernGraham grading system, with an overall grade of D+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$4.17
Graham Number $21.29
PEmg 21.02
Current Ratio 2.95
PB Ratio 2.86
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2016
Total Current Assets $3,567,594,000
Total Current Liabilities $1,210,785,000
Long-Term Debt $3,275,662,000
Total Assets $8,303,199,000
Intangible Assets $3,639,000,000
Total Liabilities $4,860,250,000
Shares Outstanding (Diluted Average) 309,784,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $1.80
Dec2016 $1.50
Dec2015 $1.38
Dec2014 $1.25
Dec2013 $1.02
Dec2012 $0.87
Dec2011 $0.71
Dec2010 $0.58
Dec2009 $0.45
Dec2008 $0.36
Dec2007 $0.28
Dec2006 $0.20
Dec2005 $0.16
Dec2004 $0.12
Dec2003 $0.10
Dec2002 -$0.25
Dec2001 $0.03
Dec2000 -$0.01

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $1.51
Dec2016 $1.31
Dec2015 $1.16
Dec2014 $1.00
Dec2013 $0.82
Dec2012 $0.68
Dec2011 $0.55
Dec2010 $0.43
Dec2009 $0.34
Dec2008 $0.26
Dec2007 $0.20
Dec2006 $0.13
Dec2005 $0.07
Dec2004 $0.02
Dec2003 -$0.03
Dec2002 -$0.08
Dec2001 $0.01

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

Other ModernGraham posts about related companies

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BorgWarner Inc Valuation – December 2016 $BWA
Ford Motor Company Valuation – November 2016 $F
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Advance Auto Parts Inc Valuation – November 2016 $AAP
General Motors Company Valuation – November 2016 $GM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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