In a bid to optimize its portfolio,
LKQ Corp ( LKQ Quick Quote LKQ - Free Report) recently inked a deal to divest the PGW Auto Glass (“PGW”) business to One Equity Partners. PGW is a distributor of aftermarket glass to the auto industry in North America. The business added $400 million to LKQ’s 2021 annual revenues and generated an EBITDA margin of 10%. The financial terms of the deal are still kept under wraps. Subject to satisfactory closing conditions and regulatory approvals, the deal is scheduled for completion during second-quarter 2022.
LKQ’s strategic acquisitions and divestment of non-core businesses are boosting its prospects. The buyouts of Elite Electronics, Green Bean Battery, Greenlight, and Fabtech Industries have enriched the firm’s product offerings and buoyed 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, will further aid top-line growth.
Last month, LKQ reported fourth-quarter 2021 results. The auto replacement auto parts provider not just posted a comprehensive beat but also witnessed a year-over-year increase in sales and earnings. It also forecasts organic revenue growth for parts and services in the range of 3-5% for 2022.
An increase in miles driven and delay in new car production amid chip concerns are resulting in more repair and maintenance activities, thereby spurring demand for LKQ products. Consumers who were earlier keen on purchasing new vehicles or upgrading to new models now prefer to replace the worn-out parts of their existing vehicles. The longevity of vehicles is also driving the demand for auto replacement parts. For the smooth functioning of the aging vehicles, customers are spending heavily to replace any faulty parts and components. Either way, demand for auto replacement parts is on the rise.
Encouragingly, LKQ generated free cash flow (FCF) of $1.1 billion in 2021 and expects to generate at least $1 billion in FCF this year as well. As a show of its solid cash flow generation ability and balance sheet strength, the company declared its first-ever dividend in October 2021.
On the flip side, the company is battling with supply chain snarls across all segments, which are resulting in product scarcity and freight delays. Congestions within the ports and at the rail hubs resulted in delays and increased the costs for ocean and land freight, both in North America as well as Europe. Also, it is facing inflationary headwinds related to labor and commodity costs. Problems related to ocean freight and container capacity constraints will continue to remain a challenge in 2022.
LKQ currently carries a Zacks Rank #3 (Hold). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
If you wish to invest in the auto space, consider betting on
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