LKQ: The most defensive business in the auto industry is a tariff winner and could become a compounder

A strong business getting better and a tariff winner? What more do you want

Welcome to the 2nd investment case and 2nd resilience idea on Crack the Market (and the most comprehensive LKQ investment case you will find online)! Discover why this junkyard rollup turned leading supplier of alternative collision and mechanical automotive parts should rerate, and is one of the rare companies that should benefit from tariffs and might just be the next compounder in the auto space.

Subscribe for free if you want to receive my analysis of major events impacting stocks (like my recent article on US auto import tariffs and which companies are the winners and losers of this tectonic shift in the automotive world), a teaser for every future company article I publish (every week) and megatrend articles with the associated stocks (every month). For paying subscribers you will a deep dive into a company every week (like this one), a megatrend analysis with a deeper breakdown and a granular analysis of the stocks exposed to the theme every month, and access to a me, a portfolio management professional, for your questions.

Twice a week, I will release deep dives into stocks and sectors that fit into the three themes that I see winning in this age of tariffs and deglobalization: resilience, sovereignty & reshoring, China. I will then deep dive into the opportunities in the AI data center value chain.

Take advantage of this once in a generation opportunity to build long term wealth by investing in great stocks that will deliver returns for your portfolio for years to come.

You can already read my first 6 deep dives, all of which I see as winners in this new world of tariffs and deglobalization:

• ASML (reshoring & China idea): The most innovative company in the world will 2.5x its EPS by 2030.

• LKQ (resilience idea): The most defensive business in the auto industry is a tariff winner and could become a compounder.

• Atlas Copco (resilience & reshoring idea): The best industrials business in the world is on sale, extremely resilient and will benefit from US reshoring.

• Badger Meter (resilience idea): The perfect business in the perfect end market, water meters are the definition of resilience.

• Knorr Bremse (resilience idea): Who knew making brakes was this lucrative? Rerating with self help story and upside from German infra plan.

• Flex (reshoring idea): The electronics manufacturing giant building Nvidia’s servers and enabling reshoring is becoming a better business.

After reading this article, you will understand what this company does, why it is so defensive, why it may just win in this new tariff world and why its change in focus from growth to total shareholder returns could make it a strong compounder for the next decade.

This is a company that is number one in everything it does (aftermarket collision parts, salvage, remanufacturing and car body paint in North America, technical parts in Europe), has delivered 500bps of margin expansion in its North America business over the last 5 years, is rolling out its playbook to do the same in Europe and is laser focused on cash generation and shareholder returns (FCF x3 in 4 years). The business is defensive (you don’t have a choice but to repair your car when you get into an accident and the insurance company selects the cheapest part available, which LKQ provides) with a huge market (close to 600m cars in North America and Europe that need parts and servicing) and focus on inflecting organic growth, portfolio optimisation and the continued consolidation of the EU market. LKQ trades at a discount to historical multiples due to 1+ years of disappointment (10-11x PE vs 14-15x historically), with growth which should inflect, at a time where investors are looking for defensive exposure, and potential divestures of non core assets, making it a great company to own for the next 3-5 years and beyond. On top of that, the company is a rare double hedge against tariffs. LKQ could become a compounder given its low to mid single digit operating profit growth and low capital needs meaning it can reinvest its cash in its shares accelerating EPS growth.

In this article I go through:

1. LKQ’s business and summarise its 2024 Investor Day (focus on cash flow and capital allocation, growth algorithms, moats and market positioning).

2. How this one stop shop cannot be disrupted thanks to its unparalleled distribution network and scale.

3. Why the business model is so defensive, especially in this new era of tariffs and deglobalisation thanks to a unique asset, and how the company has significantly improved its execution and margins

   and will continue to do so.

4. Why the company has faced declining sales over the last year and why we are at an inflection point.

5. The singular focus on management on cash generation and shareholder returns that could make LKQ a rare compounder in the auto space.

LKQ Investment Case