LKQ Purchase Fills in Strategy Gap

We are raising our fair value estimate for narrow-moat-rated

The shares of LKQ were already trading in the 3-star range prior to the acquisition announcement, and the increase in our fair value estimate results in no change in our star rating. The stock closed the day of the announcement up $0.12 to $40.34. Currently trading at a slight 2% discount to our new fair value estimate, we view the shares of LKQ as reasonably priced relative to our estimates for revenue, profitability, and returns on invested capital.

The company expects the addition of Stahlgruber to be earnings-accretive by $0.14-$0.16 per share in 2018 and by $0.17-$0.19 per share in 2019. LKQ estimates Stahlgruber 2017 revenue of EUR 1.6 billion and EBITDA of EUR 128 million. From 2014 to its estimated 2017, management states that Stahlgruber’s annual revenue and EBITDA growth amount to 7% and 9%, respectively. Assuming an April 1 closing, and through 2019, we estimate that, including 5% organic revenue growth and USD/EUR currency translation in the $1.20 range, Stahlgruber incremental revenue and EBITDA come to roughly $2.0 billion and $170 million, respectively. We estimate LKQ 2017 revenue and EBITDA at $9.6 billion and $1.1 billion, respectively.

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