LKQ (LKQ)

Automotive parts company LKQ (NASDAQ:LKQ) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 6.5% year on year to $3.46 billion. Its non-GAAP profit of $0.79 per share was 1.5% above analysts’ consensus estimates.

Company Overview

A global distributor of vehicle parts and accessories, LKQ (NASDAQ:LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.

Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.

LKQ's primary competitors include Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO), O'Reilly Automotive (NASDAQ:ORLY), and Genuine Parts Company (NYSE:GPC).

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, LKQ grew its sales at a weak 2.6% compounded annual growth rate. This fell short of our benchmarks and is a poor baseline for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. LKQ’s annualized revenue growth of 5% over the last two years is above its five-year trend, but we were still disappointed by the results.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, LKQ’s organic revenue was flat. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, LKQ missed Wall Street’s estimates and reported a rather uninspiring 6.5% year-on-year revenue decline, generating $3.46 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 2.5% over the next 12 months, a slight deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

LKQ’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 8.7% over the last two years. This profitability was mediocre for a consumer discretionary business and caused by its suboptimal cost structure.

This quarter, LKQ generated an operating profit margin of 8.3%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

LKQ’s EPS grew at an unimpressive 7.6% compounded annual growth rate over the last five years. This performance was better than its flat revenue but doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, LKQ reported EPS at $0.79, down from $0.82 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 1.5%. Over the next 12 months, Wall Street expects LKQ’s full-year EPS of $3.44 to grow 6.5%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

LKQ has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 5.6%, subpar for a consumer discretionary business.

LKQ burned through $57 million of cash in Q1, equivalent to a negative 1.6% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict LKQ’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 4% for the last 12 months will increase to 6.3%, it options for capital deployment (investments, share buybacks, etc.).

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

LKQ historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.1%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

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 averaged 3.3 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

LKQ reported $227 million of cash and $5.85 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.72 billion of EBITDA over the last 12 months, we view LKQ’s 3.3× net-debt-to-EBITDA ratio as safe. We also see its $119 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its full-year EBITDA guidance missed significantly and its revenue fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 5% to $40.02 immediately after reporting.

Updated: June 5, 2025 at 10:04 PM EDT

Before investing in or passing on LKQ, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We see the value of companies helping consumers, but in the case of LKQ, we’re out. For starters, its revenue growth was weak over the last five years, and analysts don’t see anything changing over the next 12 months. And while its Forecasted free cash flow margin suggests the company will have more capital to invest or return to shareholders next year, the downside is its organic sales performance has disappointed. On top of that, its low free cash flow margins give it little breathing room.

LKQ’s P/E ratio based on the next 12 months is 10.6x. This valuation multiple is fair, but we don’t have much confidence in the company. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $52.53 on the company (compared to the current share price of $39.01).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.