Shareholders of LKQ would probably like to forget the past six months even happened. The stock dropped 25.4% and now trades at $31.49. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy LKQ, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think LKQ Will Underperform?
Despite the more favorable entry price, we don't have much confidence in LKQ. Here are three reasons you should be careful with LKQ and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Specialized Consumer Services companies should track organic revenue in addition to reported revenue. This metric gives visibility into LKQ’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, LKQ’s organic revenue averaged 1.7% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests LKQ might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect LKQ’s revenue to rise by 1.2%, a deceleration versus its 3.6% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, LKQ’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of LKQ, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 8.5× forward P/E (or $31.49 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
Stocks We Would Buy Instead of LKQ
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