Over the last six months, LKQ’s shares have sunk to $26.75, producing a disappointing 9.6% loss - a stark contrast to the S&P 500’s 9.7% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in LKQ, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think LKQ Will Underperform?
Even though the stock has become cheaper, we're cautious about LKQ. Here are three reasons you should be careful with LKQ and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
In addition to reported revenue, organic revenue is a useful data point for analyzing Consumer Discretionary - Specialized Consumer Services companies. This metric gives visibility into LKQ’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, LKQ’s organic revenue averaged 2.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests LKQ might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Free Cash Flow Projections Disappoint
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.
Over the next year, analysts’ consensus estimates show they’re expecting LKQ’s free cash flow margin of 5.8% for the last 12 months to remain the same.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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 has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of LKQ, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 8.9× forward P/E (or $26.75 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of LKQ
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