There’s treasure in car salvage yards for investors in LKQ Corp

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There’s treasure in car salvage yards for investors in LKQ Corp

 


'one man’s junk is truly another’s treasure.' (Stock image)
‘one man’s junk is truly another’s treasure.’ (Stock image)

A few years ago, we were treated to two television series which charted the ups and downs of two family-run car salvage yards – Junkyard Empire and Scrappers. Not surprisingly, everything about the operations seemed rough and ready – with the wage bills never guaranteed to be met at the end of the week.

If you watched a few of these episodes, you would probably come to the conclusion that while the companies did well, the industry is far more suited to the family-run or private company arena rather than one listed on the stock market with a value of over $9bn. But you would be wrong. Welcome to the LKQ story.

LKQ Corporation – which stands for Like Kind Quality – is the largest provider of alternative automotive collision replacement parts, including recycled parts and after-market parts, in the US. The company obtains and dismantles salvage vehicles (recycled parts) and sources after-market parts from Asia (non-brand parts) to supply the collision repair market with an alternative to more expensive original parts.

It was formed in 1998 through the combination of a number of wholesale recycled products businesses in Florida, Michigan, Ohio and Wisconsin and expanded through internal development and more than 220 acquisitions.

In the US, where LKQ has both cultivated demand and consolidated supply for more than a decade, the company is the largest player in the market. In 2011, LKQ acquired Euro Car Parts, a leading commercial distributor of after-market parts based in the UK. Since 2011, LKQ has continued to expand its European footprint, making two more acquisitions.

In the US, the use of alternative parts has reached 36pc – driven by insurance companies’ efforts to lower repair costs. LKQ partners with insurers to drive demand for alternative parts that often cost between 20pc and 40pc less than comparable original parts. With European use of alternative parts under 10pc, an opportunity exists for LKQ to penetrate the market by forging partnerships with key European insurers.

LKQ has become the leader in the UK in only four years, yet has ample scope for growth. The group has worked to establish a foothold in continental Europe through acquisition and has focused on becoming a leading mechanical parts business serving repair shops. LKQ will likely further consolidate the European market and develop opportunities in other markets where cars are plentiful, insurance is mandatory, and regulations affecting alternative parts are light.

Over the last decade, the number of parts required to repair a car as a result of a collision has been increasing. In some cases, this is due to greater difficulty in repairing aluminium parts, but a lack of qualified technicians (panel-beaters to you and I) means it is also easier to replace rather than repair a part.

As the cars are being dismantled, a complete inventory of the parts is taken and catalogued allowing the company to track the profit made from each vehicle on a real-time basis.

Given the broad geographic network of their operations, particularly in the US, even if a customer cannot get the part they want at their local outlet, the salesperson has the ability to check the entire company inventory for the part to be shipped next day delivery.

The track record of LKQ shows that for this company, one man’s junk is truly another’s treasure.

Aidan Donnelly is head of equities in Davy Private Clients. For disclosures, visit www.davy.ie/AidanDonnelly

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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