PORTFOLIO REVIEW - Scotiabank

June 23, 2016

PORTFOLIO REVIEW

We are replacing Cal-Maine Foods, Inc (CALM) with LKQ Corp. (LKQ).

LKQ distributes aftermarket and replacement car products both in the United States and Europe. The company offers various products including recycled or refurbished collision repair and mechanical components. LKQ made an acquisition to expand the company's operations throughout Europe and is well positioned to benefit if recent trends across the car industry continue. The company is currently included in Sabrient's Forward Looking Value portfolio.

LKQ has developed a relationship with insurance companies and body shops for their quality products at a low prices, as well as a distribution system that one of the most efficient in the industry. In auto claims, insurance companies are often the ones deciding the replacement parts that get used during the repair process. Insurance companies generally prefer to use the lowest costing replacement parts as long as they meet the same "like, kindness, and quality" requirement. Some policies require insurers to make repairs using only OEM parts, but this type of policy appears to be slowly becoming less popular as it requires a higher monthly premium. It is estimated that currently OEM products make up 65% of the collision repair market, while aftermarket, recycled, or refurbished parts account for the remaining 35%.

The overall market for collision repair products is also predicted to grow into the future. As the quality and durability of automobiles continues to improve, the age of the average car on the road today will continue to increase. The current average age of an automobile in the U.S. is 11.4 years compared to Europe's increasing average of 9.6 years. This is compared to 2009 when the average age of the car on the road in Europe was 8.6 years. This trend of longer lasting cars, that is expected to continue, will lead to a higher percentage of cars experiencing a collision over the course of the car's life.

LKQ is currently undervalued based on the growth that is expected over the next year. The stock is also undervalued when compared to the overall market. When compared to the S&P 500, LKQ has a price-to-earnings ratio of 17.2 compared to an average of 21.5 for the S&P 500. LKQ's projected EPS growth rate of 29.9% over the next year is greater than the S&P 500's projected growth rate of 11.4% over the same period.

EXIT (SELL) Cal-Maine Foods, Inc (CALM)

BUY LKQ Corp. (LKQ) Market Cap: Mid Sector: Consumer Cyclicals Industry: Auto Parts Dividend Yield: 0% Forward P/E Ratio (Next 12 months): 17.2 Price When Picked: $33.61 (closing price on 6/23/16)

BUSINESS SUMMARY

LKQ Corporation, together with its subsidiaries, distributes replacement parts, components, and systems used in the repair and maintenance of vehicles in the United States, the United Kingdom, and internationally. It operates in three segments: North America, Europe, and Specialty. The company distributes various products, including aftermarket collision and mechanical products; recycled collision and mechanical products; and refurbished collision products, including wheels, bumper covers and lights, and remanufactured engines. It also offers recycled products, such as engines, transmissions, door assemblies; sheet metal products comprising trunk lids, fenders and hoods, lights, and bumper assemblies; and refurbish products consisting of wheels, lights, plastic bumpers, and chrome bumpers, as well as heavy-duty truck products. In addition, the company sells scrap metal and other materials to recyclers; and extracts and sells the precious metals contained in certain of recycled parts, such as catalytic converters. Further, it sells parts from older cars and light-duty trucks directly to consumers; and operates self service retail facilities that sell recycled automotive products from end-of-lifevehicles under the name LKQ Pick Your Part. Additionally, the company distributes and markets trucks and off-roads; speed and performance; recreational vehicles; towing; wheels, tires, and performance handling products; and miscellaneous accessories. It principally serves collision and mechanical repair shops, new and used car dealerships, and metal recyclers, as well as retail customers. The company was founded in 1998 and is headquartered in Chicago, Illinois.

Full disclosure: Sabrient produces portfolios for UITs and indices that are tracked by ETFs. At any given time, we may have 800 of our top-ranked stocks in one or more of these portfolios. Some of the stocks selected for the Earnings Busters portfolio may also be in one or more of our UITs or indices portfolios. We will try to point out when a recommended stock is in one of our UITs or indices.

Editor's Note: The Sabrient Earnings Busters newsletter is written by Daniel Vickers, analyst at Sabrient. Daniel also assists in the selection of stocks and maintenance of the portfolio. He can be reached at dvickers@

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their own financial circumstances in acting on any stock selection made by Sabrient. Sabrient makes no representations that the techniques used in these reports will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

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