LKQ Uses U.S. Car Parts Formula To Ride Into Europe

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It's not enough that LKQ Corp. outruns the competition in the U.S. and Britain.

Now the Chicago-based alternative car-parts distributor is beating a path to continental Europe.

LKQ 's ( LKQ ) British invasion in October 2011 was finessed through the $347 million acquisition of Euro Car Parts, the leading aftermarket parts distributor in the U.K.

In LKQ's recent march to the Continent, it picked off Netherlands-based Sator Beheer, tops in its home country as well as Belgium, Luxembourg and Northern France. The $272 million buy closed May 1.

Sator's parts are used by more than 6,000 customers, served from 11 distribution centers.

"It's clearly a strategically significant acquisition," said LKQ spokesperson Joseph Boutross. "It increases our European footprint and puts us on the continent."

At the end of the second quarter, Europe accounted for 27% of the company's parts and services revenue, up from zero before its foray into Britain less than two years ago.

Sator almost surely won't be LKQ's last buy in Europe.

"Acquisitions are core to our story," Boutross said. "The pipeline is robust. We have tremendous amount of runway in North America and Europe."

LKQ, which stands for "Like Kind Quality," has expanded its footprint in North America for years. In 2012, it acquired a record 30 outfits.

New Parts For Business

LKQ's biggest buy at $810 million remains 2007's Keystone Automotive Industries, which nearly doubled its revenue and added more than 160 distribution warehouses .

"They know how to make an acquisition and integrate it effectively and speedily," said Elliott Schlang, managing director of Great Lakes Review, an institutional research boutique.

Great Lakes Review likes to focus on "best of class" midsize companies in the Midwest. LKQ is one.

"They're 20 times the size of their nearest competitors. That alone gets our attention," Schlang said.

The market for alternative car parts in the U.S. is highly fragmented, with lots of mom-and-pop operators. Schlang says LKQ has 25% to 30% share of that market.

In North America, LKQ is largely involved in collision repair parts such as headlights, fenders and doors, followed by mechanical components such as recycled engines, transmissions and body assemblies.

That puts it in a different market than do-it-yourself auto retailers such asAutoZone ( AZO ) andO'Reilly Automotive ( ORLY ), Schlang says.

Insurance companies typically pay for collision repairs and encourage repair shops to use some alternative parts to save money since they're 20% to 50% cheaper than original parts.

And since LKQ is the largest distributor, it often gets the business.

"It basically has an unmatched distribution network that reaches most major markets in the U.S. and Canada within the next day," Schlang said. "Their network of warehouses around the country and their ability to deliver with their own fleet of trucks gives them a leg up over everybody else."

LKQ has more than 3,500 trucks in North America to move parts from warehouses to repair shops.

Its close ties with insurance companies and repair shops spur sales.

"In North America, LKQ is building partnerships that make it easier for repair shops to source parts," said analyst Craig Kennison of Robert W. Baird, in an e-mail.

Inventory Goes Online

LKQ recently forged a new partnership with CCC Information Services, for example, which provides software connecting repair shops and insurance companies for looking up the cost of parts.

After checking the CCC One database, repair shops would phone LKQ or other suppliers for parts. Now they can order online straight from LKQ via the CCC One system.

Kennison expects LKQ inventory to be accessible to more than 4,000 repair shops through CCC One, resulting in higher demand.

LKQ is trying to replicate its business model in Europe.

"In Europe, LKQ is building its distribution footprint and partnership with the insurance industry to develop demand for collision parts, which is driving robust growth," Kennison said.

Unlike the U.S., LKQ's European business is more skewed to mechanical parts than parts for collision repairs. But that's changing as LKQ adds more collision-focused components to its network.

"LKQ is positioned to be a leading distributor of alternative parts in Europe as the market for less expensive parts takes off," Kennison noted.

Because collision repairs are paid mostly by insurance companies, LKQ's business hasn't been as susceptible to the ups and downs of the consumer economy.

"They've had 12 years of consistent growth right through the recession," Schlang said. "The consistency is unbelievable."

Earnings and revenue over the last four years have grown 23% a year on average. In the second quarter, revenue jumped 24% to $1.25 billion. Organic growth (excluding acquisitions) was up 13% for parts and services, with Europe accelerating 37.8% and North America 7.3%.

Earnings in the quarter rose 19% to 25 cents a share. LKQ stock jumped nearly 12% after the Aug. 1 report that gave new 2013 guidance.

Management raised the outlook, expecting organic revenue growth of 8.5% to 10.5% vs. 6.5% to 8.5% previously and EPS of $1.03 to $1.10, up from its earlier view of $1 to $1.09. LKQ earned 87 cents a share in 2012.

Besides Sator, it made six buys in the quarter of local or regional parts distributors in the U.S. and Canada.

LKQ is the fourth-largest firm by market cap in IBD's Retail/Wholesale-Auto Parts industry group, after AutoZone, O'Reilly andGenuine Parts Co. ( GPC )Advance Auto Parts ( AAP ) is a little smaller. Of those five biggest, LKQ stock is up the most this year, 40%. The company also has the highest Composite Rating in the group, 97 of a possible 99.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAP , AZO , GPC , LKQ , ORLY

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