Potential Upside For LKQ Corporation (NASDAQ:LKQ) Not Without Risk

LKQ Corporation's (NASDAQ:LKQ) price-to-earnings (or "P/E") ratio of 13.8x might make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for LKQ as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for LKQ

Keen to find out how analysts think LKQ's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For LKQ?

There's an inherent assumption that a company should underperform the market for P/E ratios like LKQ's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in EPS. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Turning to the outlook, the next three years should generate growth of 14% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 10.0% each year, which is noticeably less attractive.

In light of this, it's peculiar that LKQ's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On LKQ's P/E

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that LKQ currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for LKQ that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.