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How bad Weather Generates Big Profits for LKQ Salvage Parts Business

bad winter weather good for LKQ salvage parts

LKQ, one of the nations largest salvage parts dealer has been growing by about 26 percent annual clip since it went public in 2007. About 20 percent of the growth is contributed to acquisition and 6 percent through organic salvage yard sales. The company which started in Chicago had $6.7 billion in annual sales for year end 2014.

LQK generates revenues three ways: aftermarket parts, which it imports from manufacturers (mainly from Taiwan), salvage parts from damaged, inoperable or older vehicles and through its automobile paint business.

Parts and auxiliary services represent 90 percent of total revenue. The company began operation under the LKQ name in 1998 through a composite of salvage yard operations from Florida, Michigan, Ohio and Wisconsin.

How does LKQ Make Money

LKQ competes with over 6000 salvage yards across the country in the sale of salvage parts; it competes with Copart in the purchasing of collision damaged vehicles from insurance companies; it contends with Schnitzer Steel Industries, (acquired Pick-N-Pull Auto Dismantlers), in the scrap metal recycling business. The company purchases wrecked vehicles from insurance companies, auto dealership and individual car owners. LKQ policy is to purchase cars that are between 3 to 10 years old, preferably popular brands like the Ford Explorer, Toyota Camry, and Honda Acura.

In 2014 the company purchased 284,000 salvaged vehicles with about 227,000 of them from insurance salvage auctions inventoried by insurance companies like Geico, Allstate, State Farm, Farmers and Nationwide to which the company has cultivated strong relationships. The average amount paid per vehicle is $1900, with payments starting at $250.

The most popular items are engines, vehicle front end assemblies, doors, transmissions, trunk lids, bumper assemblies, wheels, head and tail lamp assemblies, mirrors, fenders and axles. Parts are sold for 25 to 50 percent less than OEM prices and generating a roughly 50 percent margin.

The company strengthened its position in the auto parts business by purchasing Keystone Automotive, the largest nationwide provider of aftermarket collision replacement products, recycled OEM products and refurbished products. From AutoZippy analysis LKQ controls about 15 percent of the general USA parts collision and repair market and about 20 percent of the salvage market.

Why LKQ Loves Bad Weather

The demand for second hand parts is fueled by the number of vehicle accidents. Bad weather conditions results in an increase in car accidents; it provides the perfect environment for collision and write-offs.

During the three months of winter there is a higher need for vehicle replacement parts due to weather related accidents. As stated before LKQ purchases 80 percent of all its salvage vehicles from insurance companies. When the weather is severe and there are an unusually high number of accidents on the road, that contributes to a larger supply of total loss vehicles. Because SUPPLY outstrips DEMAND LKQ ends up in the happy position of obtaining salvage vehicles at a discount.

LKQ also makes more money on the converse of this situation. Insurance companies increasingly
utilize salvage parts for repairs on vehicles older than four years old (saving up to 50 percent on parts for repairs). In this scenario insurance companies are customers of LKQ, purchasing salvage parts for repairs on collision vehicles through repair shops.

One example to underpin this point is the number of chrome bumpers that State Farm purchases from LKQ. At the last quarter conference call, the company's 49 year old CEO, Robert Wagman, highlighted the fact that chrome bumper sales to State Farm were up 22.3 percent. Mark Roberts, Founder of Off Wall Street Consulting Group, cited that 30 percent of all accidents takes place when drivers are reversing, which usually results in damaged bumpers. About half of LKQ's sales are collision parts while the other half is mechanical repair parts like radiator, transmission, crankshaft, etc.

The Deer Collision Factor

deer accidents good for LKQ salvage parts

A substantial number of collisions involve deers. In the inverse, a mild winter can result in an increase in the deer population, leading to a large number of accidents in the fall season.

It is difficult to predict the future of deer collision. According the National Highway Traffic Safety Administration, about 1.5 million car (about 10 percent of the vehicles purchased in 2014) wrecks involving deers occur annually, resulting in about $1 billion in accident repairs, 2.3% of the $42 billion collision market. According to State Farm in 2013 the average cost of repair from deer related wrecks was $3,900 per claim.

Batteries, Tires and other wear and tear

Batteries sales is a major indicator of the damage weather does to vehicles. At 0 degrees F a vehicle battery loses about 60 percent of its potential and at 32 degree F it loses about 35 percent.

As mentioned before accidents rates are more likely for drivers who are on the road during inclement weather which puts a lot of stress on tires and strain on vehicles components, generating demand for repair parts. Freezing temperatures and low precipitation cause components to fail; slippery roads surfaces cause wear and tear on vehicle components, breading havoc on the aging U.S car population, with an average of 11.3 years of age with a 100,000 miles.

More tidings of joy are on the horizon for LKQ. According to CCC, an organization that provides automotive claims and repair solutions, repair cost were up by 3.5 percent due to sophistication of newer cars. 0.4% more parts per estimate seen in 2014 verses 2013 on a pool of 19 million vehicles. Investors with an interest in the used parts market should keep an august eye on LKQ.

Tags: salvage parts LKQ insurance companies auto salvage state farm deer collision LKQ parts

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