8 Stocks With Fast Earnings, Sales Growth

AMERICANS ARE DRIVING 2% fewer miles than last year, the first such decline in nearly three decades. Apply that rate to the typical year's 40,000 or so car-wreck deaths and you might foresee a reduction of 800. Instead, expect 12,000 fewer deaths this year, say Michael Morrissey of the University of Alabama at Birmingham and David Grabowski of Harvard Medical School in a new study. Costly gasoline empties the pockets of accident-prone teens faster than those of their parents, forcing them off the road first.

Amid the good news, a shortfall of bent fenders and bashed headlights presents fresh challenges for LKQ (LKQX). As the nation's top seller of aftermarket parts, both new and recycled, it depends on accidents for supply and demand. I recommended the stock here in August 2007. It's up 10%, compared with a 17% decline for the S&P 500, but it's sharply off its March high. That seems a buying opportunity.

Chicago-based LKQ, on pace to ring up sales of $1.9 billion this year, deals in new generic parts bought cheaply from Asia (45% of sales), parts recycled from junk cars (40%) and refurbished wheels, lamps and bumpers (15%). It sells to repair shops, but demand is driven by insurers, who favor the 20% to 40% discounts available on alternative parts. LKQ buys cars from auctions, including online ones run by Copart (CPRT), whose stock is up 45% since I recommended it in August 2007.

LKQ's purchase of Keystone Automotive in October made it the only nationwide recycled parts seller. That brings advantages. It's more likely than smaller competitors to have parts in stock. Its computer pricing system can figure out which parts are scarce, and thus, deserving of higher prices. And its broad network of scouts is expert in paying just enough for wrecks. Thanks in part to its size, LKQ can now buy cars directly from insurers, which saves on auction fees.

Promisingly, LKQ bought 23% more vehicles in its first quarter than a year earlier. Sales more than doubled, or increased 9% if the effects of the Keystone purchase are ignored. Operating profit totaled 12.7 cents on the dollar, up from 11.6 cents a year earlier, as LKQ scrapped redundant costs at Keystone. Earnings per share jumped 57%.

LKQ seems likely to grow through a slow period for accidents. Craig Kennison, who covers the stock for Robert W. Baird, an investment bank, recently studied the historic relationship between miles traveled and income growth at LKQ, and found only a slight correlation. Perhaps that's because broader trends favor sales of alternative parts. They represent less than a third of overall sales of collision parts, vs. 80% for mechanical parts. That, reckons Kennison, is because the market force of consumer choice is blocked by a third party. Insurers often pay 85% of the cost of collision repairs, vs. none of the cost of repairing mechanical breakdowns. But car insurers are gradually coming around to demanding alternative parts, just as health insurers prod patients toward generic drugs. Less driving or no in the near term, the alternative-parts trade has plenty of growth potential.

Shares of LKQ now fetch 22 times this year's earnings forecast, down from a forward price/earnings ratio of 30 at the time of my last recommendation. Next year, once the Keystone buy is fully digested, Wall Street sees the company growing sales and earnings per share by 11% and 26%, respectively. That makes today's stock price seem modest.

LKQ turned up recently on a search for companies enjoying fast sales and earnings growth. Have a look at all eight screen survivors if you like, and run the search anytime using SmartMoney's stock screener and the full list of criteria.

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