Q4 revenue was in-line with us/Cons. EBITDA and EPS beat Consensus on higher than expected North American EBITDA margins. Guidance was mixed, with organic growth and EPS below, but FCF guidance was strong. Shares were flat vs. -0.4% for the S&P 500.
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With concerns over the Coronavirus spreading, we think US Retailers will likely be viewed as near-term relative safe-haven stocks given limited direct exposure to China. However, should the virus spread into a pandemic, especially in China, we see a greater impact to US retailers from indirect supply chain exposure or US GDP growth.
To help gear up for 2020 we analyzed 2019 performance, identified 10 key themes into 2020, analyzed post Q3 earnings reaction, and analyzed the key issue facing each stock under coverage into 2020.
LKQ reported in AM. Rev was in line with us/Cons, but organic growth came in ahead of expectations. While EBITDA and EPS beat Consensus by 5%, NA EBITDA margins surprised to the upside despite worsening scrap headwinds. FCF guide saw a significant positive revision. Shares +8%.
Today (10/07/19) we are assuming broader coverage of hardlines and internet retail with deep-dive reports on four companies, including a LOW downgrade to PP. We also have two ratings changes from our existing retail coverage (AAP to UP and ORLY to OP), and assuming coverage of six additional retail names with concise 1-page investment tear sheets.
This AM (9/10/19), LKQ held a call on its EU integration. LKQ did a strong job of addressing the critical questions from our preview. Our one critique is that qualitative details were lacking on how they accomplish this, but mgmt. likely relied on the ‘18/’20 analyst days for those details. LKQ shares +5%.
LKQ is hosting an analyst call on 9/10 to provide an update on its Europe segment. In Q4 18, LKQ reiterated its targeted 10% EBITDA margins (vs LTM of 7.8%) by the end of 2020. However, with the stock near 5-year lows, the market has written off this target due to a combination of executional (Exhibit 7) and macro issues. The key issue from this call is whether the updated plan is credible, and if not, should Europe be up for sale?
BorgWarner’s Tier 2 Challenges could continue into 2020
For some time now we’ve been highlighting our concerns that Supplier decremental margins could be worse than expected (see our 7/1 note). We expected pricing to come under pressure (which we saw at Lear and Visteon), we expected higher R&D/Launch costs/lower margins on launch products (ALV and BWA), and we worried that suppliers would face increased difficulty extracting savings from Tier 2 suppliers (which we saw at BWA yesterday). The key question is why would 2020 be any better? See our BWA earnings note.
Visteon Results: Not nearly as bad as feared
Guidance only came down to where consensus already was and moving pieces of the 2nd half margin uptick were clarified. Still expect that 2020 estimates will need to come down meaningfully (we’re 24% below consensus) but don’t see a near-term negative catalyst to get that process started.
This AM (7/25/19) LKQ reported Q2 19 results. Adj. EPS of $0.65 met Cons of $0.65, but the company cut the full-year guide by $0.06. They also announced an analyst event in September to go through their European plan including cost initiatives. Shares were up 5% on very low expectations.
We wanted to flag a few highlights in today's (07/24/19) Wolfe Research Auto Daily....
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