Today we have a recommendation from the Validea Hot List that is seconded by Michael Cintolo, editor of Cabot Top Ten Trader. Validea’s methodology relies heavily on tests of essential metrics based on a specific investing style, while Cintolo’s selection process is primarily technical. The stock below scored well with both advisors.
“LKQ Corporation (LKQX) — This Chicago-based auto parts firm offers a variety of original, aftermarket and used parts and systems. It has over 450 locations in the U.S., Canada and the U.K. LKQ ($5.1 billion market cap) gets strong interest from my James O’Shaughnessy- and Peter Lynch-based models.
P/E Ratio
"[Under the Growth Investor strategy,] the P/E of a company must be greater than 5, to eliminate weak companies, but not more than 3 times the current Market P/E, because the situation is much too risky, and never greater than 43. LKQX’s P/E is 22.44, based on trailing-12-month earnings, while the current market P/E is 16.00. Therefore, it passes the first test.
Revenue Growth In Relation to EPS Growth
“Revenue Growth must not be substantially less than earnings growth. For earnings to continue to grow over time they must be supported by a comparable or better sales growth rate and not just by cost cutting or other non-sales measures. LKQX’s revenue growth is 27.75%, while its earnings growth rate is 27.89%, based on the average of the three-, four- and five-year historical EPS growth rates. Therefore, LKQX passes this criterion.
Sales Growth Rate
“Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (31.2%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (39.4%) of the current year. Sales growth for the prior must be greater than the latter. For LKQX this criterion has not been met, and it fails this test.
Earnings Tests
“The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
“The first of these criteria is that the current EPS be positive. LKQX’s EPS ($0.54) pass this test. The EPS for the quarter one year ago must be positive. LKQX’s EPS for this quarter last year ($0.39) pass this test. The growth rate of the current quarter’s earnings compared to the same quarter a year ago must also be positive. LKQX’s growth rate of 38.46% passes this test.
“Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous three quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for LKQX is 13.94%. This should be less than the growth rates for the three previous quarters, which are 23.08%, 32.00%, and 35.71%. LKQX passes this test, which means that it has good, reasonably steady earnings.
Earnings Growth Rate Tests
“This strategy looks at the rate at which earnings grow and evaluates this rate of growth from different angles. The four tests immediately following are detailed below.
“EPS growth for the current quarter must be greater than the prior three quarters. If the growth rate of the prior three quarter’s earnings, 30.38%, (versus the same three quarters a year earlier) is less than the growth rate of the current quarter earnings, 38.46%, (versus the same quarter one year ago) then the stock passes.
“The EPS growth rate for the current quarter, 38.46%, must be greater than or equal to the historical growth, which is 27.89%. LKQX would therefore pass this test.
“Companies must show persistent yearly earnings growth. To fulfill this requirement a company’s earnings must increase each year for a five-year period. LKQX, whose annual EPS growth before extraordinary items for the previous five years (from the earliest to the most recent fiscal year) were 0.53, 0.69, 0.88, 1.15 and 1.42, passes this test.
“One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. LKQX’s long-term growth rate of 27.89%, based on the average of the three-, four- and five-year historical EPS growth rates, passes this test.”
- John P. Reese, Validea Hot List, May 11, 2012
Second Opinion: LKQ Corp.
“LKQX has been in a long-term uptrend since late 2008, but the latest rally came after the stock corrected from 33.5 when February began to 29.5 in late April. The solid earnings and full-year forecast on April 26 kicked LKQX from 30.5 to 33.5 in one day, and the stock has continued to climb ever since. We think it’s buyable on any weakness. Suggested Buy Range: 33-34.5 (valid for two weeks).”
- Michael Cintolo, Cabot Top Ten Trader, May 14, 2012