LKQ Earnings: Repair Demand Solid, but Profitability Challenged

LKQ LKQ reported mixed third-quarter results due to profitability challenges. EBITDA margins were down across all segments. In North America, EBITDA margin contracted 240 basis points. The inclusion of Uni-Select’s financials had a 180-basis-point negative impact, since the acquired firm’s products have lower margins than LKQ’s North American products. In Europe, EBITDA margin was down 200 basis points due to a nonrecurring tax charge (70 basis points), labor strike in Germany (40 basis points), and growing customer price sensitivity (90 basis points).

Profitability was also challenged in LKQ’s specialty and self-service segments. EBITDA margin in the specialty business was down 200 basis points, while self-service declined 300 basis points. In specialty, management called out increased price competition (competitors improving inventory levels) and unfavorable sales mix. For self-service, lower precious metals pricing coupled with elevated car costs pressured margin.

But despite near-term headwinds, we remain confident in LKQ’s long-term prospects. Following the earnings update, we’ve raised our fair value estimate to $49 per share from $46.50. We attribute over 4 percentage points of the fair value estimate increase to the time value of money since our last update, with the balance coming from upward adjustments to our near-term forecast, along with slight increases to our long-term sales and margin expectations.

Overall, repair demand remains solid, which we think will drive demand for LKQ’s aftermarket parts. Vehicle miles driven has rebounded to prepandemic levels. With more drivers on the road, we think there’s an increased probability of vehicle accidents, which in turn create repair demand. The growth of advanced driver-assistance systems could slow the rate of accidents, but we think adoption will be gradual. Notably, some vehicle models give drivers the ability to turn off ADAS.