SHAME ON ME

for neglecting

LKQ Corp.

that the outlook for car makers is ugly, but listed several auto-related companies that are nonetheless poised to profit. Chief among these are companies that make money from the 600 million cars already in existence. Only I forgot about parts specialist LKQ, despite having

its shares to readers in July 2006.

The stock is up 39% since then, a little more than double the S&P 500 index's increase. It's still worth buying, judging by the company's recent appearance on our Earnings Momentum screen. The screen scours a big database of companies for those that have beaten Wall Street's earnings forecasts of late, since studies show such companies tend to outperform the stock market over the next year. It also looks for other promising profit signs, like rising estimates, strong past growth and projections for healthy future growth. See the screen recipe for a full list of demands and use our stock screener to run the search for yourself anytime. Besides LKQ, seven other companies recently made the cut.

If you need a part for a car, you've got three choices. You can buy a new one made by the company that made the original. That's called an OEM, or original equipment manufacturer, part. You can buy a new one made by someone else. That's an after-market part. Or, you can buy an OEM part that has been stripped off another car. That's a recycled or refurbished part. After-market parts are generally a quarter less expensive than OEM ones, and recycled parts are often about half price.

LKQ sells alternative parts, both after-market and recycled, to parts dealers, repair shops and, increasingly, retailers. Advanced Auto Parts, which sold LKQ's parts via a catalog program at the time of our last story, now stocks them in 70% of its stores, up from 57% at the end of the first quarter. The program generates about $6 million in sales a year, but could be good for $25 million, say analysts. Demand from mechanics is also increasing, thanks in part to cost-cutting measures by insurance companies. Alternative parts now make up 30% of parts used in all repairs, up from 24% in 2001.

LKQ is the only nationwide distributor of recycled parts, which gives it a big supply advantage. It's out of stock on ordered parts only a third of the time, vs. half the time for the average recycled parts dealer. And the company is getting bigger. So far this year it has bought eight small businesses and one big one. The small ones collectively cost about $24 million and add more retail sales and expansion into Canada. The big one is Keystone Automotive, which will cost $811 million and should close in late October, and will make LKQ the only nationwide distributor of after-market parts, too. After the purchase, the company's total share of the alternative-parts market will jump to close to 50% from 27%. The deal is seen adding to earnings right away. LKQ aims to cut $15 million to $20 million in yearly operating costs in 2008, and $25 million to $35 million within three years.

The nice thing about the cheap-parts trade is that it's fairly recession-proof. The only thing needed to keep it going is a regular supply of wrecked cars. Maybe it's because I live in New York City, where a middle finger serves as a turn signal, but I don't see a big risk of safer driving to come. So LKQ is seen boosting its profits twice as fast as the broad stock market over the next five years, by an average of 20% a year. That makes the stock's forward price/earnings ratio of just under 30, or about two-thirds higher than our database median, seem worth paying up for.