The company you work for may be fine -- but maybe not for investment purposes 

Tuesday, June 10th, 2014

There are many places one can look to find a company to invest in, and one of those places may be the company you -- or your friends or relatives -- work for.

I received an email from Tom, whose cousin just started working for LKQ Corp. (Nasdaq: LKQ)

LKQ Corp. is headquartered in Chicago and has nearly 24,000 employees. It provides replacement parts, components and systems needed to repair cars and trucks in the United States, parts of Europe, Canada, Mexico and Central America.

The total market cap of the company is $8.4 billion, which is the number of shares multiplied by the share price. The stock trades about $28 per share and has a 52-week high of $34.32 and a low of $23.68.

The valuation ratios look rather expensive for this company -- the PE of 25.7 is far higher than the industry average of 18.2. Price to sales is also expensive for LKQ, coming in at 1.54 -- nearly twice the industry at 0.88. The price to tangible book value for the industry is 6.20; however, LKQ carries $2.4 billion in goodwill and intangible assets, which puts their price to tangible book value at 190.1.

Sales for this company look good: They’re climbing 28.1 percent year over year, which is three times the industry average of 7.6. Earnings per share year over year are just as impressive, increasing 24.0 when the industry was only up 5 percent for the same period.

The balance sheet looks OK with a current ratio of 2.70 for the company compared with the industry at 1.56. Debt to equity on the surface looks pretty good at 70.0; it’s not too much higher than the industry average of 62.64.

The company has total debt of $1.7 billion and the equity is $2.5 billion. But remember that the goodwill and intangible assets are $2.4 billion, and these can be written down if they are not worth what they are on the books.

Wipe out half the intangibles, which would be $1.2 billion, and the equity falls to $1.3 billion. The debt would stay the same at $1.7 billion. Now debt to equity is 131 percent, not such a great position.

I was disappointed to see the return on equity at 14.7 percent, which is below the industry at 18.1 percent. I was thinking that with the high growth on sales and earnings, the ROE would be higher. The net profit margin looks good at 6.0 percent compared with the industry average of 4.9 percent.

The company does a great job with its receivables, turning them over 11.8 times over the last 12 months while the industry turnover rate is only 6.3 times.

Inventory turnover is not so good for LKQ, with a rate of only 3.1 for the last 12 months when the industry average is 8.3.

Inventory on the balance sheet is currently $1.3 billion. Last year’s first quarter inventory stood at $900 million. This is a 44 percent increase in the inventory level while sales are up only 38 percent for Q1 2014 verses Q1 2013. Not too much of a problem but worth taking note of.

So what is my target sell price on this company based on my conservative forward estimate of earnings per share using a forward PE of 16.5? My target sell price would be $27.56, which uses a forward PE of 16.5 and the forward EPS estimate for December 2015 of $1.67, which is the mean of 13 analysts.

I think this stock has done well because the December 2014 EPS estimate is $1.37 and the December 2015 estimate is $1.67, a 22 percent jump.

The long-term PEG (PE divided by growth rate) looks good at 0.93.

So while I think this company appears to be a good place to work and that the stock may continue to go higher, I will take a pass on investing in it and try to find another company more reasonably priced.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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