Automotive parts company LKQ (NASDAQ:LKQ) missed Wall Street’s revenue expectations in Q3 CY2024, with sales flat year on year at $3.58 billion. Its non-GAAP profit of $0.88 per share wasin line with analysts’ consensus estimates.

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“The revenue headwinds we experienced across our global operations have been more impactful than projected in our prior guidance, and we currently do not expect these headwinds to abate in the fourth quarter. While our cost actions and synergy realization have boosted profitability, the benefits from these actions are not expected to offset the full impact of the lower revenue expectation in the fourth quarter,” stated Rick Galloway, Senior Vice President and Chief Financial Officer.

Company Overview

A global distributor of vehicle parts and accessories, LKQ (NASDAQ:LKQ) offers its customers a comprehensive selection of high-quality, affordably priced automobile products.

Specialized Consumer Services

Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Technology can be a double-edged sword, though, as it may lower the barriers to entry for new competitors and allow them to do serve customers better.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, LKQ grew its sales at a sluggish 3% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. LKQ’s annualized revenue growth of 5.7% over the last two years is above its five-year trend, but we were still disappointed by the results.

LKQ also reports organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, LKQ’s organic revenue averaged 1.2% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance.

This quarter, LKQ’s $3.58 billion of revenue was flat year on year, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 2.7% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and shows the market believes its products and services will face some demand challenges.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

LKQ has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 6.5%, subpar for a consumer discretionary business.

LKQ’s free cash flow clocked in at $341 million in Q3, equivalent to a 9.5% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

Over the next year, analysts’ consensus estimates show they’re expecting LKQ’s free cash flow margin of 5.2% for the last 12 months to remain the same.

Key Takeaways from LKQ’s Q3 Results

We struggled to find many strong positives in these results. Its revenue unfortunately missed and its EPS guidance for the full year fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.2% to $37.30 immediately after reporting.

LKQ’s earnings report left more to be desired. Let’s look forward to see if this quarter has created an opportunity to buy the stock. The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.