Hook & thesis
LKQ Corporation (LKQ) is a classic value-on-weakness setup. The stock sits around $34.20 after a year that pressured the market cap and removed the name from the S&P 500. That headline moved sentiment, but the business fundamentals remain cash generative: free cash flow of $722 million, a sensible dividend (~3.5% yield), and a manageable debt load (debt-to-equity 0.63). On a multiple basis the shares trade at roughly 12.7x P/E and 7.6x EV/EBITDA - not expensive for a business with recurring aftermarket demand.
My trade thesis is simple: buy the recent weakness for a mid-term rebound. Catalysts include an ongoing Specialty segment sale process, the upcoming Q4 and full-year 2025 print on 02/19/2026, and continued shareholder returns that have already included $118 million in repurchases and dividends in Q3 2025. Technicals are supportive of a recovery attempt - the 10- and 20-day SMAs sit just below current price and momentum indicators show bullish tilt - which makes a defined-risk swing trade attractive.
The business - why the market should care
LKQ is a distributor of vehicle parts and accessories across North America and Europe with specialty and self-service segments. The aftermarket is relatively defensive because repair parts are nondiscretionary: aging vehicle fleets and continued vehicle parc growth sustain demand for replacement parts and collision components. Management is actively simplifying the portfolio - the company completed the sale of its Self Service segment and has initiated a sale process for the Specialty segment. That reduces complexity and should free up capital to return to shareholders or redeploy into higher-return parts of the business.
Concrete numbers that support the idea
| Metric | Value |
|---|---|
| Current price | $34.20 |
| Market cap | $8.75B |
| Enterprise value | $12.71B |
| P/E | ~12.7x |
| EV/EBITDA | ~7.6x |
| Free cash flow | $722M |
| Dividend yield | ~3.5% |
| Debt / Equity | 0.63 |
| 52-week range | $28.13 - $44.82 |
Those are not aspirational numbers. The company is producing steady free cash flow ($722M) and carries reasonable leverage for the sector. At a market cap of ~$8.75 billion and enterprise value of ~$12.71 billion, the valuation equates to a conservative multiple that leaves upside if the company prints a clean quarter and provides constructive commentary on the Specialty sale.
Valuation framing
Pricing LKQ: roughly 12.7x P/E and 7.6x EV/EBITDA. For a business with recurring aftermarket demand and near-term portfolio simplification steps, those multiples look undemanding. The stock is closer to the 52-week low ($28.13) than the high ($44.82), yet generates a 3.5% cash yield and meaningful free cash flow. This combination argues that downside is limited versus the potential upside if the market re-rates the company to more normal industrial multiples (for example, an EV/EBITDA in the high-single digits to low-teens for a healthy aftermarket distributor). With a current ratio of 1.6 and return on equity of ~10.6%, balance sheet and profitability metrics support a constructive valuation case.
Catalysts
- 02/19/2026 earnings release - Q4 and full-year 2025 results could re-accelerate sentiment if guidance improves or margins surprise to the upside.
- Specialty segment sale process - a clean divestiture would simplify operations and may unlock value via proceeds or reallocation.
- Continued capital returns - management has already returned $118M through buybacks and dividends in Q3 2025; further repurchases or an increased dividend would support the valuation.
- Positive macro tailwinds for aftermarket demand - an aging vehicle fleet and steady replacement part demand act as a partial economic hedge.
Trade plan (actionable)
Entry: $34.20
Stop loss: $31.00
Target: $40.00
Time horizon: mid term (45 trading days)
Rationale: Entering at the current price gives a defined entry point near short-term moving averages and below the 52-week midpoint. The $31 stop limits downside to about 9% from entry and respects the low 30s as a psychological and technical support zone. The $40 target is under the 52-week high of $44.82 and represents a ~17% upside that is achievable if earnings and the Specialty sale process reduce uncertainty and attract multiple expansion. I expect the trade to resolve within 45 trading days because the key catalysts (earnings on 02/19/2026 and continuing corporate actions) will produce newsflow and re-rating opportunities within that window.
Position sizing guidance
Treat this as a single swing allocation sized against your risk tolerance. Using the $3.20 per-share risk between entry and stop, a 1% portfolio risk would imply a position size equal to (portfolio value * 0.01) / 3.20 shares. Adjust size if you prefer tighter stops or intend to hold through earnings, which increases binary outcome risk.
Short-term technical context
Momentum indicators are mildly constructive: the 10-day SMA ($33.43) and 20-day SMA ($33.50) are just below current price and RSI sits around 60.7, which indicates room to run before becoming overbought. Short interest levels and recent short volume show active trading interest that could accelerate moves in either direction around catalysts - a positive print could prompt short covering and amplify upside.
Risks and counterarguments
- Macro/consumer weakness: A sustained slowdown in vehicle repair spending or an economic setback could depress volumes and margins, hitting revenue and cash flow.
- Execution risk on portfolio simplification: The Specialty sale process could take longer than expected or fetch a lower price, leaving uncertainty and signaling weaker demand for assets.
- Earnings miss or weak guidance on 02/19/2026: Given the timing, a disappointing quarter or cautious outlook would likely send the stock lower and could invalidate the target in the short run.
- Competition and structural change: Consolidation among parts distributors or faster-than-expected shifts in vehicle technology could pressure margins longer term.
- Liquidity/volatility risk: Average daily volume runs in the low millions, and short activity has been material; earnings or sale news could produce outsized moves that trigger stops on intraday volatility.
Counterargument: One could reasonably argue that the market has discounted more than headline risk. Removal from the S&P and a 26% decline in 2025 attracted selling by passive funds and lowered the float appetite of institutional investors. If management cannot demonstrate margin improvement or clear value from divestitures, the valuation could compress further - especially if peers trade at materially lower multiples. That scenario is plausible and is why the trade uses a hard stop at $31 to cap downside risk.
Conclusion - stance and what would change my mind
I am constructive and taking a long swing trade in LKQ at $34.20 with a $31 stop and $40 target on the view that cash flow, a healthy dividend, and active portfolio simplification are underappreciated by the market. The mid-term timeline (45 trading days) aligns with imminent catalysts that should clarify value.
I would change my mind and flip to neutral or bearish if any of the following occur: guidance that meaningfully reduces free cash flow expectations, the Specialty sale process stalls with visible signs of weak bids, or a macro shock materially reduces replacement-part demand. Conversely, stronger-than-expected Q4 results, an attractive Specialty sale outcome, or renewed buybacks would increase conviction and justify a larger position.
Trade idea summary: Buy LKQ at $34.20, stop $31.00, target $40.00, horizon mid term (45 trading days). Keep position size aligned with a defined per-trade risk and monitor 02/19/2026 earnings and updates on the Specialty sale for progress or warning signs.