LKQ Earnings Climb on Auto-Industry Strength

Source: LKQ.

Maintaining a vehicle can be a costly proposition, especially with Americans seeking to hold onto their cars and stretch their working lifespan for as long as possible. In the replacement auto parts business, LKQ is a major player in providing what it calls alternative and specialty parts for repairs or substitutions, as it offers a cheaper choice than the more expensive parts that original-equipment manufacturers produce. Coming into Thursday morning's second-quarter financial report, LKQ investors had seen the stock climb back toward the all-time highs it set in late 2013 and were hoping to see healthy sales growth combined with a slight uptick in earnings. LKQ's results didn't give investors everything they wanted to see, but the bottom line was more attractive than most had expected. Let's look more closely at LKQ's latest results and what they say about the parts maker's future.

LKQ fixes up its earnings wellLKQ's second-quarter results featured slight surprises in both directions. Revenue growth of 7.5% resulted in record sales of $1.84 billion, but that was actually slightly less than the $1.87 billion that investors had wanted to see. On the other hand, LKQ's net income rose a greater than expected at 14% to $119.7 million, and that produced earnings of $0.39 per share, $0.03 better than the consensus forecast among those following the company.

Looking more closely at LKQ's various business segments, the company saw success in nearly all of its key focus areas. North American sales rose the least, with 6.3% gains coming almost exclusively from organic growth within LKQ's existing operations. Europe's 9.5% revenue growth came from a mix of organic and acquisition-based increases, even though the weak euro hurt European revenue by 12% in dollar terms. Acquisitions in the Specialty Parts segment were primarily responsible for sending its overall revenue soaring by 30%. Only LKQ's Other category posted declines, and that arena makes up less than 10% of the company's total sales.

CEO Robert Wagman was generally happy with the way that LKQ performed, noting that the company achieved its results "even though the headwinds of scrap prices and exchange-rate fluctuations we faced in the first quarter of 2015 continued in the second quarter." Wagman also highlighted the improvement in LKQ's wholesale European segment, and he also believes that the company's acquisition strategy remains valuable. As the CEO said, "acquisitions should enhance our competitive position and market penetration, [and] once integrated into our networks, they will offer synergy opportunities that shold create expense leverage and distribution efficiencies."

What's next for LKQ?LKQ gave an update to its full-year 2015 guidance, mostly narrowing its previous ranges without much of a positive or negative bias. LKQ now expects organic revenue growth of 7% to 8.5%, compared to 6.5% to 9% previously, and adjusted net income of $425 million to $445 million should translate into earnings of between $1.38 and $1.45 per share. The company still expects to spend around $150 million and $180 million on capital expenditures this year.

LKQ's acquisition focus has become even more apparent recently. Just since the beginning of July, LKQ acquired aftermarket collision parts distributor PartsChannel in an asset purchase. It also signed a definitive agreement to purchase Coast Distribution System, which distributes replacement parts and accessories for recreational vehicles across North America. When you add that to the purchases of eight aftermarket parts distributors in the Netherlands and various parts, salvage, and retail businesses in California, Alabama, and Iowa, LKQ's efforts to expand its scope are clear and have made a difference in its growth trajectory.

Despite the sales shortfall, LKQ investors will likely be pleased to see that the parts specialist has continued to make progress in producing earnings growth. The demand for high-quality replacement parts is unlikely to wane anytime soon, and as long as LKQ puts itself in position to benefit from favorable trends in the industry, its stock could continue to perform well.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of LKQ. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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