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LKQ Hits the Gas on Sales Gains, Acquisitions

If you have an older vehicle, you understand all too well the need for high-quality auto parts. LKQ (NASDAQ: LKQ) has worked to build itself a niche in the parts industry by providing a wider assortment of alternative and specialty auto parts and accessories for various types of vehicles. That's been a recipe for success during a strong period for the auto industry more broadly.

Coming into Thursday's third-quarter financial report, LKQ investors expected the company to post weak earnings and revenue figures, reflecting some of the concerns across the industry about whether the long cyclical boom could be coming to an end. Instead, LKQ was able to grow its business more strongly than most had expected, and it sees good times ahead. Let's take a closer look at LKQ's report to see what's coming down the road for the auto parts specialist.

Image source: LKQ.

LKQ rides higher

LKQ's third-quarter results reflected the company's ongoing success in making the most of its opportunities. Revenue soared 11% to $2.47 billion, which was considerably better than the $2.35 billion that most investors had expected to see. Adjusted income from continuing operations was up 11% to $140 million, and that produced adjusted earnings of $0.45 per share, topping the consensus forecast for $0.42 per share.

LKQ enjoyed solid performance throughout its global network. The European segment once again led the way with sales gains of 24%, of which about two-thirds came from revenue from acquired businesses. Yet organic growth rates on the continent of 4.4% outpaced the 2.5% organic boost that LKQ saw in North America. Revenue outside of parts and services actually grew at the fastest clip organically, but it still made up only about 5% of total sales. Specialty parts saw overall growth of 3.4%, coming mostly from internal growth efforts. When you add up results from all of its geographical areas, acquisitions were responsible for more than half of the gains that LKQ earned, but overall organic growth rates of 4% were still impressive. Foreign exchange also worked as a tailwind for the auto parts company during the period.

From a profitability standpoint, LKQ saw uniform results. In North America, pre-tax operating earnings were up about 9%, matching its performance from its European segment. The specialty arena lagged behind but still managed to produce gains of 2% on the segment's bottom line.

LKQ stepped up its acquisition strategy during the quarter. The parts company found 11 businesses to purchase, including two in the U.S. and nine in Europe. LKQ also opened six new branches in its European operations, with two in the U.K. and four in Eastern Europe.

What's ahead for LKQ?

CEO Dominick Zarcone was happy about LKQ's performance. "We had solid operating results across all of our segments during the quarter," Zarcone said, and the CEO noted that because of a smaller number of business days during the quarter, calendar-adjusted sales gains were actually even more impressive than the reported figures suggested.

LKQ once again responded to its latest release by making adjustments to its guidance. The parts maker sees organic revenue growth for 2017 coming in at the bottom end of its previous range, with a new range of 4% to 4.5%. Operating cash flow will now be $20 million to $25 million less than previously expected, leading the company to cut its capital expenditure guidance by roughly the same amount. However, LKQ increased the bottom end of its adjusted earnings projections by $0.02, now expecting between $1.86 and $1.92 per share.

Overall, LKQ shareholders seemed pleased with the news, and the stock climbed almost 2% at midday following the morning announcement. So far, the auto parts industry seems to be remaining healthy, and LKQ is doing a good job of capturing its fair share of the successful area.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends LKQ. The Motley Fool has a disclosure policy.