Why is LKQ Corporation (LKQ) among the best auto repair stocks to invest in now?

We recently compiled a list of 8 Best Auto Repair Stocks to Invest in. In this article, we’ll take a look at where LKQ Corporation (NASDAQ:LKQ) ranks in relation to other auto repair stocks.

According to a report by Fortune Business Insights, the global automotive aftermarket industry was valued at $418.95 billion in 2023. The market is expected to reach $568.19 billion by 2032. The acceptance of electric and hybrid vehicles are expected to propel the growth in demand for related products. replacement products. Additionally, the rise of automotive e-commerce is also contributing to the increase in sales in the market. As a result, major industry players are expanding their omnichannel platforms to facilitate online automotive after-sales services.

KPMG Corporate Finance recently released its report on the automotive aftermarket for the third fiscal quarter of 2024. The report highlights that the decline in new car purchases can lead to growth for the aftermarket sector. Despite the Federal Reserve’s recent interest rate cut, experts say new car purchases may not see an immediate recovery. That’s because auto loan interest rates typically adjust slowly, remaining high even after the Fed’s actions. Currently, average auto loan rates still exceed 9.61% for new vehicles and nearly 14% for used vehicles, posing a significant barrier to purchasing new cars. As a result, many consumers are choosing to postpone their vehicle purchase and are increasingly relying on the aftermarket for more affordable maintenance and repair solutions to extend the life of their existing vehicles. .

Additionally, the gradual adoption of battery electric vehicles (BEVs) and software-defined vehicles is reshaping the automotive aftermarket landscape. While these advancements may result in less frequent maintenance needs, they also introduce new service requirements related to battery systems and advanced electronics. BEVs are expected to account for about 8% of total vehicle sales in 2024, rising to about 29% by 2030, according to Bank of America Global Research.

Analyzing the sector’s performance during the quarter, the report highlighted that the S&P 500 Index and the Dow Jones Industrial Average (DJIA) experienced significant growth over the past year, up 34.4%. and 26.6%, respectively. The automotive aftermarket index grew at a slower pace, at 14.3%. However, it should be noted that in the third quarter of 2024, this index outperformed the two main indices with a growth rate of 8.4%. Specific segments of the aftermarket showed varied performance. For example, parts suppliers grew by 13.1% while retailers and distributors grew by 8.9%. The enthusiast products segment rebounded with an 11.3% increase after earlier declines, while service providers saw a slight decline of 3.2%.

Regardless of the challenges of high interest rates and inflation, the automotive aftermarket has proven resilient and recession-proof. The trend toward maintaining older vehicles rather than purchasing new ones, combined with technological advancements in vehicle types, is fueling industry growth. Additionally, trends suggest that while immediate growth in new car sales may be slow, there remains strong demand for aftermarket services and products as consumers adapt to changing economic conditions.

Our methodology

To compile a list of the 8 best auto repair stocks to invest in, we used the Finviz stock screener and other lists around the internet. Using our sources, we’ve put together a list of auto repair stocks sorted by market cap. Next, we ranked these stocks based on the number of hedge fund holders from Insider Monkey’s Q3 hedge fund database.

Why do we care what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the stocks selected by the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A factory worker using a robotic arm to assemble automobile body panels.

Number of hedge fund holders: 36

LKQ Corporation (NASDAQ: LKQ) specializes in the distribution of automotive products. It provides various types of vehicle parts that can replace damaged or worn components, including aftermarket parts, OEM parts and recycled parts. The Company operates through Wholesale-North America, Europe, Specialty and Self-Service segments.

The company is focused on simplifying its operations to improve returns. Recently, it sold its operations in Poland and Bosnia, which were considered loss-making, allowing management to focus on more profitable areas. It is also actively reviewing its cost structures across all its activities to improve efficiency. This includes closing underperforming sites and streamlining product offerings in Europe. Despite these initiatives, LKQ Corporation (NASDAQ: LKQ) has faced challenges in revenue growth. Its parts and service revenue declined about 4% per day, with North America seeing a 7.5% decline.

However, regardless of the weakness, management managed to increase its third-quarter revenue by 0.5% year-over-year to $3.6 billion. Its adjusted net income for the quarter decreased slightly from $231 million in the third quarter of 2023 to $230 million last quarter. Management ended the quarter with free cash flow of $661 million. Artisan Mid Cap Value Fund, in its second quarter investor letter, noted that LKQ Corporation (NASDAQ: LKQ) may not be the fastest growing company among its peers, but it has attracted attention of investors by becoming the largest distributor of mechanical parts in Europe. This gives the company a significant strategic advantage, making it one of the best auto repair stocks to invest in.

Artisan Mid Cap Value Fund stated the following regarding LKQ Corporation (NASDAQ: LKQ) in its Q2 2024 Investor Letter:

“In the healthcare and consumer discretionary sectors, Baxter International and LKQ Corporation (NASDAQ: LKQ) have been the main detractors of the stock. LKQ is the dominant player in the distribution of salvage/aftermarket collision parts in North America, with over 70% market share. In addition to continued cost inflation, lower-than-expected collision claims in North America, partly due to a mild winter, led to disappointing quarterly results. What was already a cheap stock when we launched our position in January of this year has become even cheaper. With a P/E of 10X, shares trade at a significant discount to their 10-year historical average of 14X and are also cheaper relative to LKQ’s auto parts retailer peers, which arguably have profiles of similar long-term growth. LKQ is not a fast growing company, but it can grow 2-4% and given its dominant market share and return on average tangible capital, we think it should trade at a higher valuation. Over the past decade, LKQ has also become the largest distributor of mechanical parts in Europe. As is the case in North America, independent European mechanics appreciate LKQ’s reliable distribution and competitive pricing. The European business has improved operationally over the past five years, with LKQ focusing on integrating its various acquisitions to improve its margin and free cash flow. LKQ operates in end markets with limited cyclicality as 90% of its revenue is tied to non-discretionary spending and reliably generates strong free cash flow generation. The company also meets our requirement for a healthy financial position as its debt is manageable at 2X EBITDA thanks to its attractive free cash flow. We strengthened our position on weakness.

LKQ overall ranks 4th on our list of auto repair stocks to invest in. While we recognize the potential of LKQ as an investment, our conviction lies in the belief that AI stocks have more promise to generate higher returns and do so in a shorter time frame. If you’re looking for an AI stock that’s more promising than LKQ but is trading at less than 5x earnings, check out our report on cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.