I visited LKQ for a gas tank lid for my vehicle. I was very impress with the facility and the staff was courteous (Note, attitude of the staff is a key indicator of companies health). From entering the main area, the person at the register informed me that I would have to pay $2.00 for the opportunity to look for parts.
This had me thinking, If LKQ salvage yards charge each person who entered its doors a $2.00 fee, how much does this fee contribute to total revenue. LKQ has 406 locations.
If we were to guesstimate that each location is patronized by a conservative 200 part searchers a day, then this would contribute to $48m a year to income from about 300 days of operation.
A pretty penny just on an entrance fee. In 2014, the company had $381m in net income.
However, what took me aback was that a considerable number of cars on the lot had a Copart inscription on them, meaning LKQ purchased them from Copart. In a sense, these companies are competitors, competing for damage cars sold by insurance companies.
In its annual report, LQK stated that 80% of its vehicles were purchased directly from insurance companies. There is no mention of transactions with Copart, however, a large number of the cars had a Copart inscription.
Another observation of note is that while LKQ annual report states that most of the cars purchased were 3 to 10 years old, a surprising number of vehicles were older. In fact, I was getting parts of a 1999 vehicles which was easy to obtain.
Perhaps, however, it was just a situation unique to that particular location and that It did not reflect the overall nature of the company’s inventory.
The company has been growing by a 25% clip annually with about 18% generated through acquisition. The Christian Investor only invest in companies that return handsome harvest (history of generating Free Cash Flow). Does LKQ meet this criterion? In the last three years the company has generated an average of $229m in FCF.