The aftermarket is crackling with chat around the publication of a new report in the US which describes ECP-owning LKQ as a cashless clunker driving ‘rabid’ and ‘desperate’ branch expansion in the UK with little regard for long term value.
It should be immediately pointed out that the publisher of the report, Prescience Point Research Group, is a short selling operation which stands to financially benefit from a drop in the share value of LKQ.
In the wake of the report LKQ’s shares fell by more than 10 percent, prompting the Chicago-based operation to issue a rebuttal and point to other studies contradicting Prescience’s findings. You can also read reaction from Martin Gray, CEO of Euro Car Parts, and Sukhpal Singh Ahluwalia, Chairman Euro Car Parts and LKQ Europe, here.
LKQ’s statement said it disagreed with Prescience’s report which ‘contains numerous inaccuracies’. LKQ President and CEO Robert Wagman said: “Management of LKQ stands firmly behind our company. I am proud of the honesty and integrity with which we have operated our business and take exception to any claims to the contrary.”
Prescience’s evaluation of the US operation accuses it of ‘accounting gimmickry’ that overstates the value of the business. It says it has never earned a cash-on-cash return on investment with cumulative cash flow after acquisitions of $1.623 billion and raised capital of $1.625 billion.
It says LKQ deceived investors on the level of alternative part use and bolted to Europe to purchase ECP and Sator in a bid to ‘perpetuate the illusion of GAAP profits’.
A study by brokerage and investment bank Stifel said it remained ‘steadfast in opposition’ to Prescience’s opinions.
It says the Prescience report is ‘devoid of sound logic/reasoning that would invalidate our long-term support of the company’. It says Prescience draws invalid conclusions, without argument or data and also supports invalid conclusions by manipulating valid data.
A further evaluation by Baird Equity Research says Prescience’s suggestions of accounting gimmickry are used to ‘underpin a number of sensational claims. We strongly dispute this view.’
Prescience says the growth rate for ECP branches defies logic. “As LKQ pitched investors on the open-ended growth opportunity provided by buying ECP, to our knowledge, it never publicly disclosed that the UK aftermarket parts industry was in significant contraction, or that it is projected to continue contracting; but, LKQ touted ECP’s 30 percent+ ‘organic revenue growth from 2009-2001.”
It goes on to say: “The more new ECP stores LKQ opens in a given period, the more it can inflate its consolidated organic growth.”
Prescience says that the way in which initial LKQ estimates of the number of branches possible in the UK have been continually revised upwards hints of desperation. “LKQ began unsustainably juicing its organic revenue growth via the rabid opening of ECP stores,” it says.
Baird’s report says the picture in Europe is much better than portrayed by Prescience since more of the market here is built on mechanical parts with growth potential from crash repair.
“We remain bullish on the opportunity in Europe, where LKQ is consolidating the market for mechanical automotive repair parts while building a new franchise in the market for collision automotive repair parts.”
Baird says ECP’s growth is also possible since it is taking advantage in the reduction of rivals’ share and revenue.
“Contrary to assertions that LKQ is ‘facing problems and quickly scrambling for cover’ LKQ has posted impressive results in Europe since the acquisition of Euro Car Parts. LKQ has reported double-digit same-store sales during each of the eight quarters it has operated in the market.”
Prescience says that LKQ ‘appears to have deceived investors’, telling them that alternative part use (APU) in US crash repair parts stood at 38 percent while its filings with the US Securities and Exchange Commission estimate usage has risen from 32 to 37 percent.
The 37 percent figure was used in the July issue of CAT to contrast to the low level APU in the UK which LKQ estimated at less than 10 percent.
Stifel puts the small discrepancy down to a question of timing with the data provider, CCC, LKQ and the general public.
“We suspect LKQ is a paid subscriber to CCC data services and it is likely this difference is due to timing of data relative to public reports.”
Cash bang wallop
The reports throw up some interesting questions for the potential for APU and crash repair in the UK.
Besides saying it overstated APU use in the US, Prescience points to a lawsuit from Chrysler claiming that LKQ has infringed patents in the production of parts.
The suit is being contested by LKQ and Stifel believes it ‘poses no direct risk to LKQ’s business’.
Even so, LKQ settled out of court with Ford in a similar case in 2009 and it now distributes APU parts under licence which Stifel believes will be renwed this year.
How this situation plays out in the UK and Europe remains to be seen, but it is notable, too, that vehicle manufacturers in the US have embarked on price-matching with LKQ to defend their share of the market, something which may eventually come to afflict the UK and Europe, too.
The Baird study reveals that efforts to supply insurers with cheaper alternative parts is starting to bear fruit at ECP, however, with eight pilot programmes now in place and two supply deals signed under non-disclosure agreements.
Prescience also claims that the recent purchase of Sator is ‘designed to hid the problems occurring at Euro Car Parts’. It says that after removing Sator’s second quarter revenue and contribution, ECP’s receivables grew at twice the rate of revenue. “This is a major red flag for investors to consider.”
Stifel says more quarterly data is needed for an ‘apples-to-apples’ calculation and that: “According to management commentary, we also suspect there might have been other nuances related to the deal closing/LKQ assuming ownership that may have been impactful.”
Prescience also questions the track record of certain LKQ directors, and the incentive structure at the company, and also picks out some negative customer reviews on the internet.