vendredi 9 décembre 2016

Not so great ROE stocks: LKQ (Part I)

It's hard to erase what you've learned and what made sense to you.

I've been a big fan of high ROE stocks for some time now, so it's been automatic: if a stock has a ROE lower than 20, I almost immediately look elsewhere.

In the recent past, I realized that, in some cases, a medium ROE is fine when a business has a great moat and great growth.

In that category, there's LKQ, the aftermarket auto parts provider that's a big holding of Giverny Capital. It's also a stock nobody is talking about.

That stock doesn't look so great at first sight. But if we dig a little, we can find something interesting:

Beta: 0,55 (stocks with a Beta under 1 always get my attention because they're usually very predictable stocks)

As we can see below, the growth is very consistent:

2011 EPS: 0,72$
2012 EPS: 0,88$
2013 EPS: 1,04$
2014 EPS: 1,26$
2015 EPS: 1,39$
2016 EPS: 1,54$
EPS growth from 2011 to 2016: 114%

Actual ROE: 15
Average ROE last 5 years: 15

Debt VS earnings: About 9 times (medium-high)

Shares: A little dilution every year for the last 5 years (very light dilution, however)

Momentum indicators:

Sales growth last year: 30%
EPS growth last year: 20%

Actual PE: 22
Forward PE: 16
Average PE last 5 years: 24

O'Reilly performance last 5 years: 272%
Advance Auto Parts performance last 5 years: 156%
LKQ performance last 5 years: 141%

Take note that O'Reilly and Advance auto Parts are not exactly in the same sector, but it's close. They're also trading for a higher forward PE than LKQ.

In retrospect, I think that LKQ is a good buy. There's steady growth, OK ROE, a sector which is absolutely not related to fashion or legislation, little volatility and nobody gives a shit about that stock. The debt is a little high, but not too much. I'd rather see buybacks than dilution, but once again,  dilution is reasonable.

Popular stocks move like crazy. Quiet stocks go their own way.

7 commentaires:

  1. Hello Penetrator,

    I would like to learn your opinion on Moody's Corp. a stock which I also think has extremely wide moat. It has average ROA of 20.53% over 5 years, it does not has a ROE since the firm has negative equity, it used to have >1000% ROE in some years. It has absolutely zero capital requirement to grow.

    Earnings is 6.04 times Total liability, so the negative equity should not be a problem as long as they are bringing in the cash.

    It is selling at a reasonable price too, at 21 times trailing P/E and 19 times forward P/E. Moody's and S&P each have 40% a piece of the rating market but Moody's metrics are way better. Fitch has 10% and is private company.

    Buffett owns about 13% of the business and it was Joel Greenblatt's favourite stock. JB brought it at 21 times forward P/E at a time interest rate was 6% and he regretted selling it too early. He talked a lot about it in his class. Enclosed is the script. You can search the key word "Moody's"

    This is a stock people would probably not boast about owning because of the 2008 fiasco and the rating agency's responsibility. Buffett was being dragged to Congress for being the majority shareholder.

    I own a little of it myself (about 0.5% NAV) cos I want it to comes down and buy more. I am not trying to hype it or something, it would be impossible. What do you think about this stock?

    Kind regards,

    1. I've never really looked at that stock. The numbers you bring are interesting. I'll take a deeper look at it.

  2. Also looking forward to your "Not so great ROE stocks Part II" I really enjoyed the first part on LKQ.

    I have been addicted to checking for new content in your blog since i think it is unique and second to none when it comes to ROE investing!

  3. Morningstar has it as a 2star with fair value 10 % below current price.The numbers do not look great.Not sure of the attraction.

    1. When I look at Morningstar, I check datas, not stars or analysis. Usually, when you check only the recommandation, you miss a shitload of important stuff.

  4. Here's a plan for LKQ: Buy at $25. Sell at $33. Rince. Repeat.
    My plans usually do not work...but sometimes these cyclical stocks just keep going up and down, up and down.

    As for Moody's... besides a lawsuit by the U.S. Department of Justice, they may not be the same company they used to be. They may have branched out their range of business services or taken on extra risks. I read an article about the Moodys moat not being as strong as it used to be. But I cannot find the article despite quite a bit of searching.