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Used Car Shortage: Painful For Dismantler LKQ

The Wall Street Journal has a fascinating article today on high prices of used cars, owing to a shortage caused by crummy new car sales (and leasing) during the depths of the recession.

With demand picking up and supply low, used-car prices have surged, and given that one can borrow money much more cheaply to buy a new car than a used one, the Journal notes that a new car, in terms of monthly payments, can be just as cheap as a late-model auto. Weird.

LKQ Chart

LKQ data by YCharts

All of this is bad news for people who buy used cars, like car dealers and, down the value ladder, auto dismantlers. LKQ (LKQ), a company busy consolidating the dismantler industry, has seen its profit margins narrow due to higher used car prices (it buys junkie old cars, tears them apart and sells the parts to body shops and merchanics). Steel prices haven’t been so great, either. LKQ reports fourth-quarter results next week.

As YCharts has noted, LKQ brings efficiencies to the dismantling industry that mom-and-pop shops can’t match, but to date those efficiencies haven’t been so dramatic that LKQ is immune to other market forces, like used car and steel prices. The company trades at a lofty PE ratio and its growth is largely dependent on acquisitions, with organic (or, same-store) growth slower than one would hope.

LKQ PE Ratio TTM Chart

LKQ PE Ratio TTM data by YCharts

As higher new-car sales of today start to work their way into the used-car market, perhaps the cost squeeze on LKQ and others will lessen. In that sense, LKQ is suffering from a temporary problem. But the shares don't seem particularly cheap to encourage buying now.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.

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