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TMFDeej (99.47)

Crash your car? Turn that frown upside down, I’ve got an investment opportunity for you

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April 15, 2008 – Comments (5) | RELATED TICKERS: LKQ

Lame title, I know, but I do have an interesting idea to write about so deal with it ;).  It’s funny how being OCD about investing changes your perspective on things.  I see the conversations that I have with people in a different light now than I used to, in a Peter Lynch sort of way.  Here’s a great example.  As some of you who have read my blog before know, during the day I work in a field that is related to the auto industry.  Yesterday I was speaking with the manager of a large dealership about how business is.  Not surprisingly, it’s pretty bad.  That’s not the interesting part of the conversation though.  What I found especially intriguing was when he told me that he has seen a significant up tick in auto parts sales to independent repair shops.  If this is a wide-spread phenomenon, it means that in tough economic times, like what we are currently experiencing, consumers are choosing to repair their vehicles to keep them on the road longer instead of buying something new.  Not only are they choosing to repair them, but they are doing so as cheaply as possible by going to independent repair shops rather than the more expensive dealership service departments. 

This story immediately made me think of a company that I read a short blurb about in Smart Money magazine the other day, LKQ Corp. (LKQX).  Its shares of have been under pressure over the past couple of weeks because California is considering passing a law banning the use of recycled auto parts in insurance repairs.  Goldman published a note yesterday stating that their channel checks lead them to the conclusion that this law will not pass.  Furthermore, Goldman stated that colder winter temperatures this year probably led to an increased number of traffic accidents, which would be bullish for LKQX because its parts would be used in the repairs. 

These developments, along with an increase in consumers trying to save money by having their cars and trucks fixed as cheaply as possible would be great for a company like LKQ.  The problem is its price.  Even after its recent slide, LKQX currently has a P/E of just under 35, which is a little rich for me…especially in the current market environment.  The company has been knocking the cover off the ball with earnings quarter after quarter though, so while I will not purchase shares of this company in real life if I can find a way to fit it in my overcrowded CAPS portfolio I probably will.

Deej

No position in LKQX

5 Comments – Post Your Own

#1) On April 15, 2008 at 7:48 AM, Gemini846 (88.80) wrote:

Nice writeup. Here's a confirming tidbit I "found"

Given the recent pullback from a 52-week high above $24 (and the associated multiple contraction from 24x our 2009 EPS estimate to now ~20x), we believe that the stock can be purchased prior to 1Q08 results being reported. We believe that upside exists up to our $24 price target, driven largely by multiple expansion, with perhaps mild upside to current estimates. We believe that downside should be limited given that over 30% EPS growth is expected this year even at the bottom end of management’s $0.73-0.77 guided range (which we believe is surpassable).

Reiterate Outperform. LKQ’s business has scant macro-economic exposure, given that 85% of collision repair work is at least partially paid for by insurance companies, weather should provide a tail wind, at least for 1Q08, and a potential catalyst exists in the re-entrance of State Farm into the alternative parts market (which could happen this year). The market has become accustomed to LKQ beating estimates, and would likely view an in-line result negatively, but we do not believe that is a significant risk in the near term. Our $24 price target represents 24x our 2009 EPS estimate of $1.00, a discount to our projected 29% three-year EPS CAGR, in-line with its median historical forward multiple, with approximately 20% upside from current levels.

I agree that while I don't see an undervalued company here I think you could see a few points worth of reward. The State Farm thing is especially nice for me, since to use "alternative" parts to repair my car I've had to collect the check from them directly then haggle with a local body shop. It takes longer but I've always been able to at least save the deductable. My dad joked for years about his "chinese hood".

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#2) On April 15, 2008 at 8:48 AM, Gtrinvestor (99.88) wrote:

Deej -

Nice real world insights.  Agree w/ you on the multiple though.

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#3) On April 15, 2008 at 9:26 AM, TMFDeej (99.47) wrote:

Thanks Gemini846 and Grtinvestor.  It was just something that popped into my head this morning that I wanted to get down on vitrual paper.  I didn't put a whole lot of research into this one.  Minimal research and a high P/E are good enough to rake in a few CAPS points, but not for real money :).

Man, I've got a slam dunk huge CAPS point winner that I plan on writing about this afternoon.  Minimal down side and a short term double are possible.  It's a short that unfortunately I have not been able to do in real life, but not for a lack of trying.

Deej

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#4) On April 15, 2008 at 10:34 AM, abitare (99.38) wrote:

Right idea. P/E is to rich for my blood. I would take a look at some autoparts dealers/sellers with a more reasonable P/E.

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#5) On April 15, 2008 at 10:38 AM, mandrake66 (94.90) wrote:

I was thinking along the line of auto parts recently as well. I figured that people would want to keep their current cars running a lot longer.

The two companies I've been looking at are DORM and ORLY, because they've both been turning up recently on various screens I've been running, and are both currently 5-star CAPS. 

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