First Cut Stock Study Report

Transcription

1 First Cut Stock Study Report Company Name: LKQ Ticker: LKQ Date of Study: 11/28/2016 Price: Your Name: Ann Cuneaz $ (11/25/16) address: annc@betterinvesting.org City: Madison Heights State: MI Chapter Name (if applicable): BetterInvesting Home Office Staff Discuss why you consider this to be a high quality, growth company that should be investigated further. Please include comments on historical sales and EPS growth, pre-tax profit margin, return on equity, and debt. The historical growth of sales and EPS has been strong and steady over the past 10 years. UP, straight and parallel certainly pertains to this stock. While the 5-year trend on profit margin is down and should be monitored, profit margin has been fairly consistent over the past 3 years. Return on equity is adequate and steady. The debt level is a little high, but seems to be in the range of normal for this company. Interest coverage of more than 12 times indicates that debt is at a manageable level. Briefly describe how the company makes money: LKQ is a global distributor of vehicle replacement parts, components, and systems used in repair and maintenance, as well as specialty products and accessories. LKQ is the largest domestic alternative and mechanical replacement products provider. Collision repair shops and insurance companies (which fund 85% of U.S. collision repairs) want alternative parts that are up to 50% below the cost of OEM aftermarket parts. LKQ is also a leader in Europe through recent acquisitions including Euro Car Parts (U.K.) and Sator Beheer (Benelux region). (Source: Morningstar) Projected growth rate for sales: 12% Why did you select this rate? Discuss from where future growth will come. While the initial sales growth rate projection of 15% is supported by the historical growth, the current research indicates that 12% is a more reasonable and supportable growth rate for sales. Analyst reports from Morningstar and Value Line project sales growth of 12-13% sales growth over the next 5 years. LKQ s own sales growth goal (found in a recent presentation LKQ made to the analyst community) is 10% over the long term and 6-8% organic growth. LKQ has a long history of growing the business

2 through acquisition, and this strategy will continue to drive future sales growth. Projected growth rate for earnings per share: 12% Why did you select this rate? I started by using the preferred procedure. The pre-tax profit margin was lowered from 9.5% (5-year average) to 8.5% to reflect the downward trend in this metric. Research reports indicate that recent acquisitions are in lower margin operations, so the 8.5% PTPM seems reasonable. The number of shares outstanding was adjusted up to 320M, which is supported by increasing number of shares seen in the historical data. After these adjustments are made, the preferred procedure calculates the EPS growth rate to be 11.6%, assuming sales growth of 12%. Most analysts that follow this stock are much more optimistic in the future growth of EPS with estimates ranging from 13% to 27%. LKQ s stated goal is to grow EPS at a rate of 15% over the long term. Growing EPS faster than Sales requires either an improvement to the pre-tax profit margin and/or a reduction in the number of shares outstanding. Neither of these conditions are supported by the recent history or the current research. I selected a growth rate of 12% for EPS (down from the initially selected 15%) based largely on the preferred procedure calculation. While this seems to be a conservative selection, it is reasonable based on what I have learned about the company. Projected High P/E: 24 The high P/E from 2013 was 33.6 and was felt to be outside the normal range of the remaining 4 values. I projected the average high P/E to be 24, which is the average of the remaining 4 high P/Es, rounded down. Projected Low P/E: 17 The historical low P/Es are in a tighter range. The average low P/E of 17.4, rounded down, was used as the projected average low P/E. Projected Low Price: $25.8 This is the average low P/E times the Low EPS based on the trailing twelve month EPS. The calculated low price is reasonably below the current price of $33.44, so this is selected. At the current price, the stock is a (check one): Buy or Hold or Sell

3 At the current price, the upside-downside ratio is: 4.0 to 1 Compound Annual Return Using Forecast High P/E: 14.0% Your final recommendation (check one): Buy or Hold or Sell Explain: Based on this SSG, LKQ is a buy at the current price (up to $35). Based on previous historical performance, LKQ appears to be insulated against an economic recession or a slow-down in new car sales LKQ has made a number of acquisitions in the past. Growth by acquisition can be a risky strategy, and LKQ's performance could be negatively influenced by paying too much for an acquisition and/or failing to efficiently add new operations into the business. Morningstar also cites the Anti-Car Theft Act which requires all parts recyclers to catalog vehicle identification numbers for most parts they recycle as a possible risk. "In January 2009, the Justice Department authorized implementation of an electronic system but has yet to issue final rules. If LKQ were ever forced to comply with this regulation, it could represent a significant expense, causing operational inefficiency as each individual, recycled part is painstakingly identified and cataloged." As always, investors are advised to perform your own research and analysis of the data prior to making a decision to buy, hold or sell this stock.

4 Stock Selection Guide Company LKQ Date 11/25/16 Prepared by BI Data taken from BI Stock Data Where traded NAS Industry Auto Parts Capitalization --- Outstanding Amounts Reference Preferred ($M) Insiders % Institution Common (M Shares) Debt ($M) 3,264.2 % to Tot Cap 48.8 % Pot Dil VISUAL ANALYSIS of Sales, Earnings, and Price Symbol: LKQ FY 2016 Q3 Latest Quarter Year Ago Quarter Percentage Change Sales ($M) 2,387 1, % Earnings Per Share % (1) Historical Sales Growth 27.1% (3) Historical Earnings Per Share Growth 24.0% (2) Estimated Future Sales Growth 12.0% (4) Estimated Future Earnings Per Share Growth 12.0%

5 2 EVALUATING Management 5 5-YEAR POTENTIAL This combines price appreciation with dividend yield to get an estimate of total return. It provides a standard for comparing income and growth stocks. A Indicated Annual Dividend Closing Price B AVERAGE YIELD - USING FORECAST HIGH P/E Avg. % Payout Forecast High PE C COMPOUND ANNUAL RETURN - USING FORECAST HIGH P/E Annualized Appreciation Average Yield Annualized Rate of Return Last 5 Year Avg. Pre-tax Profit on Sales 9.2% 9.6% 8.4% 10.0% 10.9% 10.3% 9.9% 9.4% 8.7% 9.0% 9.5% % Earned on Equity 11.0% 8.7% 9.7% 10.6% 11.8% 13.2% 13.2% 13.6% 14.2% 13.9% 13.6% % Debt To Capital 20.0% 43.7% 38.6% 33.8% 29.8% 36.8% 36.3% 35.7% 40.7% 33.7% 36.6% 3 PRICE-EARNINGS HISTORY as an indicator of the future This shows how stock prices have fluctuated with earnings and dividends. It is building block for translating earnings into future stock prices. CLOSING PRICE (11/25/16) HIGH THIS YEAR LOW THIS YEAR A B C D E F G H Year Price Earnings Price Earnings Ratio Dividend % Payout % High Yield High Low Per Share High A / C Low B / C Per Share F / C * 100 F / B * AVERAGE CURRENT/TTM 1.52 AVERAGE PRICE EARNINGS RATIO: 20.8 CURRENT PRICE EARNINGS RATIO: EVALUATING RISK and REWARD over the next 5 years Assuming one recession and one business boom every 5 years, calculations are made of how high and how low the stock might sell. The upside-downside ratio is the key to evaluating risk and reward. A HIGH PRICE - NEXT 5 YEARS Avg. High P/E 24.0 X Estimate High Earnings/Share 2.68 Forecasted High Price $ 64.3 B LOW PRICE - NEXT 5 YEARS (a) Avg. Low P/E (b) Avg. Low Price of Last 5 Years (c) Recent Market Low Price (d) Price Dividend Will Support 17.0 X Estimate Low Earnings/Share 1.52 Forecasted Low Price $ Indicated Dividend 14.0 % 14.0 % High Yield Selected Forecasted Low Price $ 25.8 C ZONING using 25%-50%-25% Forecasted High Price 64.3 Minus Forecasted Low Price Range. 25% of Range 9.6 Buy Zone Hold Zone Sell Zone % 25.8 to to to 64.3 Present Market Price of is in the BUY Zone D UPSIDE DOWNSIDE RATIO (POTENTIAL GAIN VS. RISK OR LOSS) High Price 64.3 Minus Present Price Present Price Minus Low Price Current Yield AVERAGE YIELD - USING FORECAST AVERAGE P/E Avg. % Payout Forecast Average PE COMPOUND ANNUAL RETURN - USING FORECAST AVG P/E Annualized Appreciation Average Yield Annualized Rate of Return To 1 E PRICE TARGET (Note: This shows the potential market price appreciation over the next five years in simple interest terms.) High Price Closing Price X % Appreciation 10.4 % 10.4 % LKQ