LKQ Earnings: Repair Demand Continues To Remain Solid, Driving Solid Sales Growth Globally

We elected to leave our fair value estimate of $46.50 for LKQ LKQ unchanged, following second-quarter earnings. We expect near-term demand to remain solid for the balance of the year. In North America, LKQ increased sales by nearly 5% year on year, thanks to stronger pricing (offset cost inflation). The company maintains that supply chains continue to improve, driving gains in aftermarket collision parts volume. Sales in Europe were up nearly 11% year on year, thanks to solid pricing. The growth in vehicle miles driven in Europe isn’t as high as it is in North America, but it’s still growing, supporting parts and services demand.

Overall, we still see few changes to the trends we’ve discussed in past quarters. Both vehicle miles driven and average vehicle ages continue to march higher, creating demand for vehicle repair. As passenger vehicles log more miles and stay on roadways longer, wear and tear starts to take shape. In our view, LKQ will be a key beneficiary of these trends. Also, the older vehicles get, the higher likelihood vehicle owners opt to repair vehicles at non-OEM repair shops that buy parts from aftermarket parts providers like LKQ. Repair technicians value LKQ’s strong order fulfillment rates (approximately 95% in aftermarket parts and 75% in salvage parts, based on our estimates) and wide assortment of vehicle parts.

On valuation, we’re still maintaining our overvalued assessment. We think the company’s stock has gotten ahead of fundamentals. We see LKQ as a steady grower over the next handful of years. We think the market is baking in stronger midcycle estimates than we expect. On our end, we’re taking a more measured approach by fading operating margins into midcycle, which we forecast to land at 10.6% by 2027. This compares with the 11.6% operating margin we project for 2023.