Old Economy Auto Parts Stock a Better Play Than Any Tech Stock?
Wednesday, February 27th, 2013
By Mitchell Clark, B.Comm. for Profit Confidential
Tomorrow a real successful company reports its earnings results, and its track record on the stock market is impressive. LKQ Corporation (NASDAQ/LKQ) is in the auto parts business, selling replacement parts and components for vehicles and heavy trucks. It’s one of those old economy businesses that have been making a lot of money for shareholders.
It’s somewhat counterintuitive, but like so many old economy businesses we’ve been looking at, business is better for LKQ in the auto parts sector than it is in a lot of other industries, even technology. On the stock market, LKQ has become a 10-bagger over the last 10 years. The company’s stock chart is below:
Chart courtesy of www.StockCharts.com
In its third quarter of 2012, LKQ’s revenues grew 30% to $1.1 billion, of which 5.6% was organic and the rest was due to acquisitions. Even with those acquisitions, the company’s earnings grew 10% to $54.0 million, while diluted earnings per share grew 5.9%.
The company recently acquired four salvage yards and a scrap recycling business. During the third quarter, LKQ opened 10 new Euro Car Parts branches, bringing its total branch count in the United Kingdom to 120.
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It will be very interesting to see if LKQ can beat the Street with its earnings results. The company’s top-line growth may be even more important. On the stock market, LKQ effected three two-for-one stock splits over the last seven years, and the company has a history of beating earnings-per-share guidance.
Countless old economy businesses are reporting good financial growth and are doing great on the stock market. Much better, in fact, than what we all think are the typical faster-growing industries.
In these pages, we have looked at A. O. Smith Corporation (NYSE/AOS), another old economy business that sells water heaters and boilers. (See “The Old Economy’s Back…and It’s Making Great Money.”) The company’s latest earnings beat Wall Street estimates, and the company has been soaring on the stock market. A one-year stock chart of A. O. Smith is below:
Chart courtesy of www.StockCharts.com
The stock market is definitely fatigued, but the earnings results from so many old economy businesses suggest that the industrial economy is holding up well. This doesn’t mean that there is a lot of new hiring going on; only that earnings are holding up with relatively solid revenue growth.
The stock market is rewarding those companies providing real economic growth, because it’s so hard to come by these days. While it used to, the stock market no longer cares where this growth comes from, and this is why so many old economy stocks are performing well.
I think a lot of these industrial businesses will keep doing well financially and on the stock market this year. Speculators can play this momentum, because there is so little of it left in capital markets.
Investors look to the stock market for growth, but many avoid boring old economy businesses to their detriment. Especially now in the age of austerity, finding good businesses that are consistently growing their revenues and earnings is much more difficult. LKQ is a 10-bagger on the stock market and should report solid fourth-quarter earnings results. If the company continues to report good numbers, it will be a much better play over any technology stock this year. Even if it doesn’t, this business still has a lot of momentum.
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