Analyst Note| Dawit Woldemariam |
Narrow-moat-rated LKQ recently held its investor day, where it provided updates on its segment operations and commitment to generate strong free cash flow throughout the cycle. Following the event, our $46 fair value estimate is unchanged, as our long-term thesis remains intact. The demand environment continues to improve as key metrics like vehicle miles traveled and vehicle age have created demand for LKQ’s products. We also believe LKQ’s scale-driven cost advantages over smaller competitors will allow the company to earn strong returns on invested capital through our forecast (approximately 20% on average). In addition, we think management will be able to meet its $1 billion annual free cash flow target, thanks to moves to structurally improve working capital efficiency.