Having said some relatively
in July about LKQ (
), YCharts feels compelled to follow up. And, as with all
roll-ups of fragmented, humdrum industries (past efforts include
funeral homes, waste haulers and septic tank pumpers), one is
surprised the damn things don't consolidate more easily!
LKQ stock is still aloft, trading at a significant premium --
-- to the overall market, based, one suspects, on the company's
comforting story (all those mom-and-pop auto junk yards and such
really ought to be run by one, highly efficient company, and
together they'll be so much more profitable) and the fact that
revenue growth continues.
LKQ Revenue TTM
So what's the problem? Well, digging into third-quarter
results, the economies of scale one expects in such an enterprise
seem slow in coming. Revenue was up 29.7%, fabulous, but that was
almost entirely from acquisitions. Organic revenue growth
(same-store sales, to you retail fans) was just 1.6%. That latter
figure does not a growth stock make.
And net income rose just 9.8%. That's not the kind of
operating leverage - net income growth more rapid than revenue
growth - one aims for in business. The culprit? Cost of good sold
rose more rapidly than revenue, as did distribution expense and
A few details: LKQ, founded and backed by the former
chieftains of Waste Management (
), buys totaled cars and strips them for parts, reselling the
bumpers and engines and such to auto-body and car-repair shops.
What's left over is scrap metal, and so the LKQ boys are back in
the waste business, in a way, and it seems scrap steel prices
have fallen. Chalk that up to the slowdown in China and
elsewhere. So, less revenue from scrap. LKQ also runs a scrap
operation of its own, and margins there are under pressure.
Distribution costs are up due to a big acquisition in Europe
where, it seems, the car-repair shops expect parts to be
delivered pronto, more so than in the U.S.
Also, for a variety of reasons - insurer decides to total the
car, rather than fix it; mechanic ordered the wrong part; car
owner decides against the repair - up to 20% of parts ordered by
repair and auto-body shops get returned to suppliers such as
Sounds like dreary details, ones we'd prefer to be spared
altogether. But a rollup of a fragmented industry is all about
the details. Our
, made clear the efficiencies LKQ brings to the auto parts
business. But larding a corporate structure on top of all those
formerly independent operations requires the efficiencies be
quite dramatic to make the whole thing worthwhile. Rollups in
trash hauling and funeral homes largely failed to live up to
expectations for this reason.
Or, as an old Waste Management wag once complained to me: The
most efficient operator in the business is a one-truck hauler
where the owner drives the truck.
To be sure, LKQ is not alone in attaining a lofty stock price
based more on revenue growth than on profit growth.
) and Amazon (
) are two glamour stocks that fit that pattern.
CRM Revenue TTM
AMZN Revenue TTM
In fact, LKQ looks absolutely cutting edge compared to those
two tech stocks. Note its
LKQ Revenue TTM
LKQ may yet turn its many salvage and parts operations into a
company with lush, ever-widening margins, where incremental
revenue falls heavily to the bottom line. It certainly has the
Jeff Bailey is the editor of YCharts, which includes the
YCharts Pro Platinum
for professional investors.