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Here's Why You Should Hold on to LKQ Stock for the Moment

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LKQ Corporation’s (LKQ - Free Report) shares have gained 4.4% in the past year against the industry’s decline of 4.6%.

Zacks Investment Research
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LKQ Corporation is one of the leading providers of replacement parts, components and systems required to repair and maintain vehicles. It distributes aftermarket collision and mechanical products, recycled collision and mechanical products, bumper covers and lights, as well as remanufactured engines and transmissions. LKQ Corp serves the United States, Canada, U.K., Germany, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland, Slovakia, Austria and various other European countries. Besides wholesales, it also offers recycled automotive products at its self-service retail facilities across the United States.

However, this Zacks Rank #3 (Hold) firm is currently facing certain headwinds that are keeping investors cautious. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper:

Strategic acquisitions bode well for LKQ. The buyouts of Elite Electronics, Green Bean Battery, Greenlight and Fabtech Industries have enhanced its product offerings and sales. LKQ merged its subsidiary, Auto Kelly Bulgaria, with ElitKar, creating one of Bulgaria's leading distributors of automotive spare parts. The more recent acquisitions of Hanu, one of the leading automotive parts' wholesalers in the Netherlands, and SeaWide Marine Distribution, an electronics wholesaler distributor, are expected to further aid top-line growth.

Low leverage and high liquidity are other strong points for the company. LKQ’s long-term debt reduced 1.2% yearly to $2,777.1 million as of 2021 end. Its total debt-to-capital ratio stands at 0.32, which is low both in absolute and relative terms. The current ratio of the company stands at 1.97, higher than the industry’s 1.53. LKQ boasts of an investment-grade rating from Fitch. It also fares well in the free cash flow parameter. LKQ's annualized cash flow growth rate has been 14.9% over the past three-five years versus the industry average of 8%.

Investor-friendly moves instill shareholders’ confidence. As a testimony to its solid cash flow generation ability, the company declared its first-ever dividend in October 2021. In July 2021, LKQ extended the stock buyback program by an additional $1 billion through 2024.  It repurchased 17.2 million shares for $877 million last year.

This auto parts distributor registered quarterly revenues of $3,185 million in the fourth quarter of 2021, climbing 7.9% year on year. The parts and services' organic revenues also increased 6.6% year over year. In addition to North American and European segments, strength in LKQ’s Specialty unit, on the back of robust demand of recreational vehicles, is buoying revenues. The company forecasts organic revenue growth for parts and services in the range of 3-5% for 2022.

Despite the tailwinds, the firm is faced with bottlenecks impeding its growth.

The global chip crunch is posing major difficulties in the form of supply chain disruptions across all its segments, leading to product scarcity and freight delays. Also, congestions within the ports and at the rail hubs resulted in delays and increased costs for ocean and land freight, both in North America as well as Europe. Challenges in ocean freight and container capacity constraints are anticipated to continue till the first half of 2022. Labor and commodity costs have exhibited inflationary tendencies.

The focus on technically-enhanced components has escalated manufacturing and research and development (R&D) costs. Upgrading to high-quality auto parts to be at par with market trends has flared up costs. Restructuring and acquisition-related expenses are other headwinds. With the ongoing inflationary pressures catalyzed by the supply chain challenges, LKQ expects its bottom line to decline year over year in 2022.

The moderation of precious metal and scrap steel prices in the fourth quarter hurt the firm’s EBITDA to the tune of $16 million. With lower prices anticipated for 2022, LKQ expects to face a headwind of roughly 27 cents related to scrap steel and precious metal prices in its 2022 EPS. The favorable discrete tax adjustments in 2021 would also not reoccur, which would further impact EPS by 6 cents.

Three Key Picks

Some better-ranked players in the auto space include Harley-Davidson (HOG - Free Report) , LCI Industries (LCII - Free Report) and CarGurus (CARG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy), currently.

Harley-Davidson has an expected earnings growth rate of 1.9% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised around 21.7% upward in the past 60 days.

Harley-Davison’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters. HOG pulled off a trailing four-quarter earnings surprise of 77.59%, on average. The stock has rallied 5.2% over the past year.

LCI Industries has an expected earnings growth rate of 27.8% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised around 16% upward in the past 60 days.

LCI Industries’ earnings beat the Zacks Consensus Estimate in three of the trailing four quarters and missed the same in the other one. LCII pulled off a trailing four-quarter earnings surprise of 12.86%, on average. The stock has declined 19.4% over the past year.

CarGurus has an expected earnings growth rate of 5.1% for the current year. The Zacks Consensus Estimate for current-year earnings has been revised around 20.3% upward in the past 60 days.

CarGurus’ earnings beat the Zacks Consensus Estimate in all of the trailing four quarters. CARG pulled off a trailing four-quarter earnings surprise of 45.34%, on average. The stock has risen 65.5% over the past year.

In-Depth Zacks Research for the Tickers Above

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HarleyDavidson, Inc. (HOG) - free report >>

LKQ Corporation (LKQ) - free report >>

LCI Industries (LCII) - free report >>

CarGurus, Inc. (CARG) - free report >>