The auto industry has done well lately, and auto parts specialist LKQ (NASDAQ: LKQ) has been able to capitalize on solid industry conditions to produce good performance for shareholders. Yet recently, some growth concerns appeared on LKQ's radar, and the company decided to make a strategic shift in response. Coming into Thursday's fourth-quarter financial report, LKQ investors were looking for sizable gains in earnings and revenue, and the company delivered on that score. Yet the bigger question is what impact the company's decision to sell off its glass manufacturing business will have going forward into 2017.
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Let's look more closely at LKQ to see how it did and what it sees ahead.
Image source: LKQ.
LKQ finishes 2016 with solid performance
LKQ's fourth-quarter results were good, but they didn't entirely live up to investors' expectations. Revenue climbed 23% to $2.15 billion, but despite that impressive growth rate, the number was still well short of the consensus forecast for more than 30% growth in the top line. GAAP net income fell 9% to $86.3 million, but after accounting for extraordinary items, adjusted earnings of $0.39 per share were up $0.05 from the previous year. Still, the result was $0.01 short of what investors had wanted to see.
Looking more closely at the report, revenue growth was stronger than LKQ saw in the third quarter, bolstered in large part by its key North American business. Growth in LKQ's home territory climbed more than 9%, accelerating dramatically from the previous quarter. Europe continued to provide plenty of positive momentum, posting gains of almost 60% from year-ago levels thanks largely to acquisitions. The specialty segment enjoyed a 6% rise in sales.
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However, segment profitability was generally weaker. The specialty segment posted better margins that led to a rise of more than a quarter in its pre-tax operating earnings. But operating margin declines in North America and Europe weighed on pre-tax profit growth, limiting it to 7% and 34%, respectively. Those gains were solid, but they showed some of the challenges LKQ faces in taking full advantage of sales growth.
Yet a big part of the news from LKQ came on the strategic front. The divestiture of its OEM glass business to Vitro was just one of the moves that the company made, and other key events included the acquisition of Andrew Page Limited, an aftermarket distributor in the Netherlands, a salvage yard in Sweden, an auto-paint distributor in Pennsylvania, and three U.S.-based truck radiator distributors. In Europe, LKQ opened two Euro Car Parts branches in the U.K. and eight more in Eastern Europe.
What does LKQ see for 2017?
CEO Robert Wagman was generally positive about LKQ's results. "I am particularly pleased that despite the headwinds of a mild winter and its subsequent impact on organic growth," Wagman said, "Wholesale-North America achieved its highest annual margin levels in the last five years." The CEO also pointed to solid organic growth throughout its operations as a testament to the efforts its personnel are making toward supporting the company.
LKQ's outlook could leave some investors wanting more, though. For 2017, the auto parts specialist said that it expects organic revenue growth of 4% to 6%, which is slightly less than the 8% that most investors following the stock have been looking for. Adjusted earnings from continuing operations of $1.80 to $1.90 per share would similarly fall below the roughly $2 consensus forecast. Nevertheless, LKQ is optimistic that productivity initiatives and diversification into the Europe and specialty categories should pay off in the long run.
LKQ shareholders will want to see proof that the auto parts company can make good on its promises and deliver the growth that they expect in 2017 and beyond. Investors should watch LKQ's fundamental performance closely throughout the year to make sure that it lives up to those high expectations in its results.
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