LKQ (US:LKQ) Seeking Alphaยท2024-07-10 17:35Company Overview - LKQ Corporation is the largest provider of alternative collision replacement parts globally, including recycled and aftermarket parts [2] - The company acquires damaged vehicles, refurbishes parts, and sells them to repair shops, often at 20-40% lower costs than OEM parts [2] - Approximately 50% of LKQ's revenue is generated in the US, with 23% from Europe, and the remainder from countries like Mexico, India, and Taiwan [3] Investment Thesis - There is a secular trend towards increased utilization of aftermarket parts, which grew from 23% to 38% over 20 years until 2020, although this trend was disrupted by the pandemic [3] - As inflation normalizes, the utilization of aftermarket parts is expected to rise again, supported by insurance companies' directives to use alternative parts [4] - In Europe, alternative part utilization is under 10%, indicating significant growth potential for LKQ as it partners with insurers [4] - LKQ benefits from scale in a fragmented market, utilizing sophisticated inventory management and logistics systems to enhance efficiency [4] - The company is shifting focus towards organic growth, with expectations of higher EBITDA margins and strong free cash flow conversion under new CEO Justin Jude [4] - LKQ is projected to achieve annualized EPS growth of over 10% in the next five years [4] Market Sentiment - LKQ's stock is perceived as undervalued, trading at a current EV/EBITDA of 8x compared to a historical range of 9-14x [5] - The stock trades at 11x P/E, below the historical range of 12-20x, suggesting potential for significant upside [5] - The company could reach a stock price of $50-60 within the next year and potentially double over the next 4-5 years [5]