IB Equity Research

January 15, 2014

LKQ CORPORATION
Thesis Overview
LKQ Corporation ("LKQ" or the "Company") provides replacement parts, components and
systems needed to repair cars and trucks. This morning, a short-seller announced that LKQ
was a good short candidate. Upon this news, the stock has traded off more than 15%. This
provides long-term investors with a great value opportunity to invest in a strong cash flow
generating market leader at a significant discount to value.

Stock Rating
Catalyst Category
Price Target
Price (1/15/14): $26.50
Upside/(Downside): 50%
Ticker: LKQ
Exchange: NASDAQ
Industry: Automotive
Aftermarket
Trading Stats ($USD millions)

LKQ has produced solid returns to shareholders over the last several years through the
recession because of its extremely important part of the supply chain and its relative market
size and strength. The Company is an innovator in its space and has reshaped its industry
through its technology leading inventory management system and its sheer scale of network.
The industry it plays in is highly fragmented with most of the Companys competitors being
unsophisticated mom and pop operations. The Company has invested significant capital to
develop a network of alternative parts facilities across the U.S. and Canada. The difficulty and
time required to obtain proper zoning, as well as dismantling and other environmental permits
necessary to operate newly-sited recycled product facilities, would make establishing a new
network of locations a challenge for a competitor. The Company is poised for both organic
growth, reaping dividends off of its capital deployment strategy over the last several years, and
for continued extremely high value added and accretive tuck-in acquisition strategy (proven
over the last several years with over 150 acquisitions since inception). Since 2007, the
Companys revenue CAGR is approximately 30%. LKQs EBITDA has grown from $137M
to approximately $550M (LTM 6/30/2013), including acquisitions.

Market Cap: $7,966

Enterprise Value: $9,180
Price / Book: 4.3x
PEG Ratio: 1.16x
Dividend Yield: NA
PE Ratio: 27.7x
Forward PE Ratio: 19.3x
Source: Company filings, Wall Street Consensus

Price Performance
52 Week range: $20.09- $34.32
Analyst Details
IB Username: stala
Employer: Private asset manager
Job Title: Analyst
Analyst Disclosure
LKQ Position Held: Yes

BUY
Value
$40.00

IB Equity Research
January 15, 2014

Company Overview
Business Description
LKQ Corporation provides replacement parts, components and systems needed to repair cars and trucks. Buyers of vehicle
replacement products have the option to purchase from primarily five sources: new products produced by original equipment
manufacturers ("OEMs"), which are commonly known as OEM products; new products produced by companies other than the
OEMs, which are sometimes referred to as aftermarket products; recycled products originally produced by OEMs; used products
that have been refurbished; and used products that have been remanufactured.
LKQ distributes a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical
products, recycled collision and mechanical products, refurbished collision replacement products such as wheels, bumper covers
and lights, and remanufactured engines. Collectively, these are referred to as alternative parts.
LKQ is the nation's largest provider of alternative vehicle collision replacement products and a leading provider of alternative
vehicle mechanical replacement products, with sales, processing, and distribution facilities reaching most major markets in the
United States. The Companys wholesale operations reach most major markets in Canada, and the Company is a leading provider
of alternative vehicle mechanical replacement products in the United Kingdom. In addition to its wholesale operations, LKQ
operates self service retail facilities across the U.S. that sell recycled automotive products. The Company is organized into three
operating segments: WholesaleNorth America; WholesaleEurope; and Self Service.
FY2012 Revenue Breakdown

FY2012 EBITDA Breakdown

Europe
14%

Europe
17%

North America
83%

North America
86%

Note: Wholesale-North America and Self Service aggregated in North America above.

LKQ obtains the majority of our aftermarket inventory from automotive parts manufacturers and distributors based in the U.S.,
Taiwan, Europe and China. The Company procures recycled automotive products mainly by purchasing salvage vehicles,
typically severely damaged by collisions and primarily sold at salvage auctions or pools, and then dismantling and inventorying
the parts. The refurbished and remanufactured products that LKQ sells, such as wheels, bumper covers, lights and engines,
originate from the salvage vehicles bought at auctions and from parts received in trade from customers purchasing replacement
products from LKQ.
The majority of LKQs products and services are sold to collision repair shops, also known as body shops, and mechanical repair
shops. The Company indirectly relies on insurance companies, which ultimately pay for the majority of collision repairs of
insured vehicles, to help drive demand. Insurance companies tend to exert significant influence in the vehicle repair decision.
Because of their importance to the process, LKQ has formed relationships with certain insurance companies in North
America for which LKQ is designated a preferred products supplier. The Company is attempting to establish similar
relationships with insurance companies in Europe.

IB Equity Research
January 15, 2014

Source: Company presentations.

IB Equity Research
January 15, 2014

Market Overview

LKQ operates in a global automotive repair industry. In the US alone, the market opportunity is approximately $59 billion.

IB Equity Research
January 15, 2014

Decision makers in many automotive collision repair work are NOT individuals or mechanics. Insurance companies as payors
are often making decisions and are always looking to maintain as low a price as possible for repair work, while body shops prefer
higher margin products. LKQs relationships with insurance companies and its proprietary location based database (provided to
insurance companies for their use in directing body shops) creates a very powerful value proposition within the decision process
of automotive repair.
Like many other industries, the trend in collision repair parts is away from more expensive OEM and towards more affordable
aftermarket and recycled products (similar to many branded vs. private label products across many industries). In collision
repair, this dynamic has tremendous room for growth with New OEM parts still maintaining 62% of the market, while recycled,
aftermarket and refurbished make up the remaining 38%. This market share has continued to move in LKQs favor for the past
decade.

IB Equity Research
January 15, 2014

In addition, the market share for insurance directed repair work has grown to 52% of claims (up from 32% in 2003) as insurance
companies continue to realize the value of directing claims towards more affordable yet good quality (like, kind and quality =
LKQ) parts.

IB Equity Research
January 15, 2014

IB Equity Research
January 15, 2014

Valuation Overview
PROJECTED CASH FLOWS
(USD in millions, except per share data)
996

Total Revenue
Annual Growth
Cost of Revenue
Margin
EBITDA
Annual Growth
Margin
Less: Depreciation and Amortization
% of Capital Expenditure
EBIT
Annual Growth
Margin
Less: Income Taxes
30.0%
Unlevered Net Income
Plus: Depreciation and Amortization
Less: Capital Expenditure
Margin
Less: Additions to Intangibles
Less: Increase in Working Capital
Margin
Unlevered Free Cash Flow
Annual Growth

2008
1,908.5
1,064.7
55.8%
235.3
12.3%
33.4
50.0%
201.9
10.6%
(60.6)
141.3
33.4
(66.9)
(3.5%)
0.0
(10.2)
(0.5%)
97.6

997
2009
2,047.9
7.3%
1,120.1
54.7%
272.1
15.6%
13.3%
38.1
68.1%
234.0
15.9%
11.4%
(70.2)
163.8
38.1
(55.9)
(2.7%)
0.0
(3.5)
(0.2%)
142.5
45.9%

998
2010
2,469.9
20.6%
1,376.4
55.7%
340.0
25.0%
13.8%
41.4
67.4%
298.5
27.6%
12.1%
(89.6)
209.0
41.4
(61.4)
(2.5%)
0.0
(55.2)
(2.2%)
133.8
(6.1%)

999
2011
3,269.9
32.4%
1,877.9
57.4%
423.6
24.6%
13.0%
54.5
63.1%
369.1
23.6%
11.3%
(110.7)
258.4
54.5
(86.4)
(2.6%)
0.0
(74.0)
(2.3%)
152.5
14.0%

1000
Fiscal Year Ending December
2012
|
2013E
2014E
4,122.9 |
5,153.7
6,442.1
26.1% |
25.0%
25.0%
2,416.7 |
3,020.9
3,776.1
58.6% |
58.6%
58.6%
493.0 |
659.7
837.5
16.4% |
33.8%
27.0%
12.0% |
12.8%
13.0%
70.2 |
77.6
84.7
79.5% |
83.6%
87.7%
422.8 |
582.1
752.7
14.6% |
37.7%
29.3%
10.3% |
11.3%
11.7%
(126.8) |
(174.6)
(225.8)
296.0 |
407.5
526.9
70.2 |
77.6
84.7
(88.3) |
(92.8)
(96.6)
(2.1%) |
(1.8%)
(1.5%)
0.0 |
0.0
0.0
(133.8) |
(30.9)
(38.7)
(3.2%) |
(0.6%)
(0.6%)
144.0 |
361.3
476.4
(5.5%) |
150.9%
31.8%

2015E
7,730.5
20.0%
4,531.3
58.6%
1,020.4
21.8%
13.2%
92.3
91.8%
928.2
23.3%
12.0%
(278.5)
649.7
92.3
(100.5)
(1.3%)
0.0
(46.4)
(0.6%)
595.1
24.9%

2016E
8,890.1
15.0%
5,211.0
58.6%
1,191.3
16.7%
13.4%
93.8
95.9%
1,097.5
18.2%
12.3%
(329.2)
768.2
93.8
(97.8)
(1.1%)
0.0
(53.3)
(0.6%)
710.9
19.5%

2017E
9,779.1
10.0%
5,732.1
58.6%
1,330.0
11.6%
13.6%
97.8
100.0%
1,232.2
12.3%
12.6%
(369.6)
862.5
97.8
(97.8)
(1.0%)
0.0
(58.7)
(0.6%)
803.8
13.1%

0.46
459.3

1.46
529.8

2.46
584.3

3.46
610.1
3.96

Discount Factor - Mid-Period Convention

PV of Yearly Cash Flows

Present Value of Equity @ January 15, 2014

CAGR
2013-2017
17.4%

19.2%

6.0%
20.6%

20.6%
1.3%

17.4%
22.1%

DCF Assumptions

PV of 2013 Free Cash Flow Stub(1)

PV of 2014-2017 Free Cash Flows(1)
PV of Terminal Value(1)
Enterprise Value
Less:
Total Debt
Preferred Stock
Minority Interest
Plus:
Cash and Equivalents
Equity Value

0.0
2,183.4
11,639.6
13,823.1

Shares Outstanding
Implied Per Share Value
Current Price
Premium/(Discount) to Current Price

300.6
41.94
27.50
52.5%

% of TEV
0.0%
15.8%
84.2%
100.0%

% of MVE
0.0%
17.3%
92.3%
109.6%

Weighted Average Cost of Capital

Implied Perp. Growth Rate of Unlevered Free Cash Flow

(1,321.6)
0.0
0.0

(10.5%)
0.0%
0.0%

107.3
12,608.8

0.9%
100.0%

8.30%

Terminal EBITDA Multiple

12.0x
(2)

Tax Rate

(1) Assumes 0 days remain in 2013; Mid-Period Convention for annual cash flows; Terminal value cash flow occurs at December 31, 2017.
Terminal value equals present value of 2017 EBITDA of $1,330.0 * 12.0x Terminal Forward EBITDA Multiple.
(2) Implied Perpetual Growth Rate of FCF = [(Terminal EBITDA)*(Terminal EBITDA Multiple)*(WACC) - (Terminal Year FCF)] / [(Terminal EBITDA)*(Terminal EBITDA Multiple) + (Terminal Year FCF)]

3.1%
30.0%

IB Equity Research
January 15, 2014

SENSITIVITY ANALYSIS
(USD in millions, except per share data)

lkq
WACC
6.30%
7.30%
8.30%
9.30%
10.30%

Discounted
CF
2013-2017
2,255.2
2,211.2
2,168.6
2,127.5
2,087.7

lkq
WACC
6.30%
7.30%
8.30%
9.30%
10.30%

Net Debt(1)
at
09/30/13
1,214.3
1,214.3
- 1,214.3
1,214.3
1,214.3

lkq
WACC
6.30%
7.30%
8.30%
9.30%
10.30%

=>

10.0x
10,442.6
10,062.5
9,699.7
9,353.1
9,021.9

Present Value of Terminal Value

EBITDA Exit Multiple
11.0x
12.0x
13.0x
11,486.8
12,531.1
13,575.3
11,068.8
12,075.1
13,081.3
10,669.7
11,639.6
12,609.6
10,288.4
11,223.7
12,159.0
9,924.1
10,826.2
11,728.4

10.0x
11,483.5
11,059.4
10,654.0
10,266.3
9,895.3

Present Value of Equity

EBITDA Exit Multiple
11.0x
12.0x
13.0x
12,527.7
13,572.0
14,616.2
12,065.7
13,071.9
14,078.2
11,624.0
12,594.0
13,563.9
11,201.6
12,136.9
13,072.2
10,797.4
11,699.6
12,601.8

14.0x
15,660.5
15,084.4
14,533.9
14,007.5
13,504.0

10.0x
0.2%
1.2%
2.1%
3.1%
4.0%

Implied Perpetual Growth Rate of FCF

EBITDA Exit Multiple
11.0x
12.0x
13.0x
0.8%
1.2%
1.6%
1.7%
2.2%
2.5%
2.7%
3.1%
3.5%
3.6%
4.1%
4.4%
4.6%
5.0%
5.4%

14.0x
1.9%
2.9%
3.8%
4.8%
5.7%

(1) Equals Total Debt plus Preferred plus Minority Interest Less Cash and Equivalents.

14.0x
14,619.6
14,087.6
13,579.6
13,094.3
12,630.6

Divided
By
300.6
Shrs
=

10.0x
12,697.7
12,273.7
11,868.3
11,480.6
11,109.5

Present Value of Enterprise

EBITDA Exit Multiple
11.0x
12.0x
13,742.0
14,786.2
13,280.0
14,286.2
12,838.3
13,808.2
12,415.9
13,351.2
12,011.7
12,913.9

Value
13.0x
15,830.5
15,292.5
14,778.2
14,286.5
13,816.1

14.0x
16,874.8
16,298.7
15,748.2
15,221.8
14,718.3

10.0x
38.20
36.79
35.44
34.15
32.92

Equity Value per Share

EBITDA Exit Multiple
11.0x
12.0x
13.0x
41.67
45.15
48.62
40.14
43.48
46.83
38.67
41.89
45.12
37.26
40.37
43.48
35.92
38.92
41.92

14.0x
52.09
50.18
48.35
46.60
44.92

Premium/(Discount) to Current Price per Share

EBITDA Exit Multiple
11.0x
12.0x
13.0x
51.5%
64.2%
76.8%
45.9%
58.1%
70.3%
40.6%
52.3%
64.1%
35.5%
46.8%
58.1%
30.6%
41.5%
52.4%

10.0x
38.9%
33.8%
28.9%
24.2%
19.7%

14.0x
89.4%
82.5%
75.8%
69.4%
63.3%

IB Equity Research
January 15, 2014

Financial Overview
Operating Data
Reclassified
12 months
Dec-31-2008
1,908.5

12 months
Dec-31-2009
2,047.9

12 months
Dec-31-2010
2,469.9

12 months
Dec-31-2011
3,269.9

12 months
Dec-31-2012
4,122.9

LTM
12 months
Jun-30-2013
4,532.4

1,064.7
843.8
44.2%

1,120.1
927.8
45.3%

1,376.4
1,093.5
44.3%

1,877.9
1,392.0
42.6%

2,416.7
1,706.2
41.4%

2,666.9
1,865.4
41.2%

611.8
30.2
642.0

659.7
34.1
693.8

756.9
38.0
794.9

973.0
49.9
1,022.9

1,219.3
64.1
1,283.4

1,321.5
70.9
1,392.4

201.9

234.0

298.5

369.1

422.8

473.0

Interest Expense
Interest and Invest. Income
Net Interest Exp.

(37.8)
2.3
(35.5)

(32.3)
1.4
(30.9)

(29.8)
1.8
(28.0)

(24.3)
2.9
(21.4)

(31.4)
4.1
(27.3)

(37.8)
4.1
(33.7)

Currency Exchange Gains (Loss)

Other Non-Operating Inc. (Exp.)
EBT Excl. Unusual Items

1.4
167.7

0.4
203.5

0.2
270.8

(0.4)
347.3

0.2
395.7

(1.5)
0.1
438.0

Merger & Related Restruct. Charges

Impairment of Goodwill
Legal Settlements
Other Unusual Items
EBT Incl. Unusual Items

(8.6)
159.1

(2.6)
4.3
205.3

(0.7)
270.1

(7.6)
(3.9)
335.8

(2.8)
17.9
(1.6)
409.2

(5.5)
1.2
(5.6)
428.1

Income Tax Expense

Earnings from Cont. Ops.

62.0
97.1

78.2
127.1

103.0
167.1

125.5
210.3

147.9
261.2

151.5
276.6

Earnings of Discontinued Ops.

Extraord. Item & Account. Change
Net Income

2.8
99.9

0.4
127.5

2.0
169.1

210.3

261.2

276.6

Per Share Items

Basic EPS
Basic EPS Excl. Extra Items
Weighted Avg. Basic Shares Out.

$0.37
0.36
273.0

$0.45
0.45
281.1

$0.59
0.58
286.5

$0.72
0.72
292.3

$0.88
0.88
295.8

$0.93
0.93
297.8

Diluted EPS
Diluted EPS Excl. Extra Items
Weighted Avg. Diluted Shares Out.

$0.35
0.35
282.0

$0.44
0.44
288.0

$0.58
0.57
291.7

$0.71
0.71
296.8

$0.87
0.87
300.7

$0.92
0.92
302.5

Normalized Basic EPS

Normalized Diluted EPS

$0.38
0.37

$0.45
0.44

$0.59
0.58

$0.74
0.73

$0.84
0.82

$0.92
0.9

235.3
12.3%
39.0%
48.5
13.5

272.1
13.3%
38.1%
72.3
5.9

340.0
13.8%
38.1%
94.0
9.0

423.6
13.0%
37.4%
116.2
9.3

493.0
12.0%
36.2%
143.7
4.2

549.5
12.1%
35.4%
143.7
4.2

Total Revenue
Cost Of Goods Sold
Gross Profit
Gross Margin
Selling General & Admin Exp.
Depreciation & Amort.
Other Operating Exp., Total
Operating Income

Supplemental Items
EBITDA
EBITDA Margin
Effective Tax Rate %
Total Current Taxes
Total Deferred Taxes

IB Equity Research
January 15, 2014

Balance Sheet Data

Reclassified
Dec-31-2008
ASSETS
Cash And Equivalents
Total Cash & ST Investments

Dec-31-2009

Dec-31-2010

Dec-31-2011

Dec-31-2012

Jun-30-2013

79.1
79.1

108.9
108.9

95.7
95.7

48.2
48.2

59.8
59.8

161.6
161.6

Accounts Receivable
Total Receivables

147.9
147.9

152.4
152.4

191.1
191.1

281.8
281.8

311.8
311.8

413.2
413.2

Inventory
Prepaid Exp.
Deferred Tax Assets, Curr.
Other Current Assets
Total Current Assets

330.5
7.7
19.6
45.3
630.1

385.7
9.6
31.8
14.4
702.9

492.7
14.0
32.5
10.9
836.9

736.8
19.6
45.7
17.6
1,149.7

900.8
28.9
53.5
29.5
1,384.4

972.9
45.5
53.3
11.9
1,658.5

Gross Property, Plant & Equipment

Accumulated Depreciation
Net Property, Plant & Equipment

331.1
(76.7)
254.3

397.9
(108.0)
289.9

473.7
(142.4)
331.3

604.0
(180.0)
424.1

725.5
(231.1)
494.4

515.4

907.2
71.2
19.0
1,881.8

938.8
67.2
21.3
2,020.1

4.8
1,033.0
69.3
24.2
2,299.5

1,476.1
108.9
40.9
3,199.7

1,690.3
106.7
0.2
0.3
47.3
3,723.5

0.1
1,826.1
148.8
15.4
54.0
4,218.3

LIABILITIES
Accounts Payable
Accrued Exp.
Curr. Port. of LT Debt
Curr. Income Taxes Payable
Unearned Revenue, Current
Def. Tax Liability, Curr.
Other Current Liabilities
Total Current Liabilities

65.4
46.2
21.9
4.7
29.0
167.2

51.3
89.0
15.1
9.3
3.8
168.5

76.4
82.1
54.3
12.5
225.3

210.9
131.0
29.5
7.3
1.6
17.4
397.7

219.3
134.1
72.4
2.7
0.0
59.3
487.9

263.6
162.7
65.0
9.8
58.1
559.1

Long-Term Debt
Def. Tax Liability, Non-Curr.
Other Non-Current Liabilities
Total Liabilities

635.4
43.5
15.1
861.3

598.2
52.2
21.8
840.7

548.1
66.1
45.9
885.3

937.2
88.8
132.0
1,555.6

1,061.7
102.3
107.5
1,759.4

1,321.3
118.0
82.2
2,080.7

Common Stock
Additional Paid In Capital
Retained Earnings
Treasury Stock
Comprehensive Inc. and Other
Total Common Equity

1.4
790.9
241.9
(13.8)
1,020.5

1.4
816.0
369.5
(7.4)
1,179.4

1.5
869.8
538.5
4.4
1,414.2

2.9
901.3
748.8
(9.0)
1,644.1

3.0
950.3
1,010.0
0.8
1,964.1

3.0
982.4
1,170.3
(18.1)
2,137.7

Total Equity

1,020.5

1,179.4

1,414.2

1,644.1

1,964.1

2,137.7

Total Liabilities And Equity

1,881.8

2,020.1

2,299.5

3,199.7

3,723.5

4,218.3

Long-term Investments
Goodwill
Other Intangibles
Deferred Tax Assets, LT
Deferred Charges, LT
Other Long-Term Assets
Total Assets

IB Equity Research
January 15, 2014

Cash Flow Data

Reclassified
12 months
Dec-31-2009

12 months
Dec-31-2008
Net Income
Depreciation & Amort.
Amort. of Goodwill and Intangibles
Depreciation & Amort., Total

12 months
Dec-31-2010

12 months
Dec-31-2011

LTM
12 months
Jun-30-2013

12 months
Dec-31-2012

99.9
29.3
4.1
33.4

127.5
34.0
4.1
38.1

169.1
37.2
4.2
41.4

210.3
46.6
7.9
54.5

261.2
60.7
9.5
70.2

276.6
65.8
10.6
76.4

2.4
5.5
(12.5)
14.5
(15.0)
4.2
(4.8)
(0.1)
9.0
(3.5)
133.0

2.5
(4.3)
7.3
(9.6)
(0.4)
6.6
(0.4)
(20.4)
(18.1)
1.4
24.1
9.9
164.0

10.0
(15.0)
8.9
(12.3)
(67.8)
10.2
7.5
7.3
159.2

13.1
(8.0)
15.9
(18.1)
(90.1)
28.6
2.3
3.3
211.8

15.6
(15.7)
8.7
(12.8)
(95.0)
(15.1)
(0.8)
(10.1)
206.2

18.2
(19.4)
13.5
(40.5)
(70.5)
(4.5)
20.0
24.9
294.7

(66.9)
2.2
(74.2)
(138.9)

(55.9)
1.1
(65.2)
17.5
(102.5)

(61.4)
1.4
(143.6)
12.0
(191.6)

(86.4)
1.7
(486.9)
(571.6)

(88.3)
1.1
(265.3)
(352.5)

(86.8)
1.8
(453.6)
(538.6)

5.3
5.3
(10.0)
(10.0)

2.3
2.3
(53.0)
(53.0)

(7.5)
(7.5)

1,361.4
1,361.4
(1,054.3)
(1,054.3)

1,025.1
1,025.1
(878.1)
(878.1)

1,483.6
(1,099.7)

10.4

8.2

14.0

11.9

17.7

18.2

Special Dividend Paid

Other Financing Activities
Cash from Financing

6.1
11.8

9.3
(33.2)

12.5
19.0

(7.5)
311.4

(7.6)
157.1

(55.4)
346.8

Foreign Exchange Rate Adj.

Net Change in Cash

(1.0)
4.8

1.5
29.8

0.2
(13.2)

1.0
(47.4)

0.8
11.5

(0.6)
102.2

Other Amortization
Asset Writedown & Restructuring Costs
Stock-Based Compensation
Tax Benefit from Stock Options
Net Cash From Discontinued Ops.
Other Operating Activities
Change in Acc. Receivable
Change In Inventories
Change in Acc. Payable
Change in Unearned Rev.
Change in Inc. Taxes
Change in Other Net Operating Assets
Cash from Ops.
Capital Expenditure
Sale of Property, Plant, and Equipment
Cash Acquisitions
Divestitures
Invest. in Marketable & Equity Securt.
Net (Inc.) Dec. in Loans Originated/Sold
Other Investing Activities
Cash from Investing
Short Term Debt Issued
Long-Term Debt Issued
Total Debt Issued
Short Term Debt Repaid
Long-Term Debt Repaid
Total Debt Repaid
Issuance of Common Stock
Total Dividends Paid