After a volatile six months, LKQ Corporation (NASDAQ:LKQ)’s stock price is at the same level as it was immediately after Prescience Point first unveiled its short position, sending the stock tumbling from $32 to $26 (currently $25.59), but Stifel analyst James J. Albertine is maintaining his Buy rating and $39 price target for the automotive replacement parts company ahead of its 2Q earnings statement expected on July 31.

LKQ Corporation Wedgewood

“As we expect in line results in 2Q (by and large), we believe many investors will continue to focus on organic growth trends, flow through of 2011-2013 vintage M&A, pressures from higher than expected auction prices and some deceleration in scrap pricing,” writes Albertine, who expects to see $0.34 EPS for 2Q14, in line with consensus, and sets his price target at 14x EBITDA and 23 forward PE based on 2015 estimates.

Prescience Point thinks LKQ Corporation’s NA organic growth is overstated

Prescience Point’s basic argument is that LKQ Corporation (NASDAQ:LKQ) has been facing persistent margin decline and a lack of cumulative cash flow generation, but that it has papered over these problems with aggressive acquisitions. It also claims that LKQ’s North American organic growth has been overstated. That’s why Albertine thinks most investors will be paying careful attention to EBIT margin expansion and better short-term free cash flow. It would also be a good sign if management started buying back stocks at the current depressed price to show that they are confident of pulling through the short campaign.

Investors should watch for LKQ margins, and more info on patent deals

Albertine is also interested to hear more about operating leverage from LKQ Corporation (NASDAQ:LKQ)’s recent acquisitions especially Keystone in North American markets. LKQ could be one of the few businesses that benefits from this year’s particularly harsh winter because it created a 4-6 month backlog of collision work spreading the extra profits between first and second quarters.

Other factors that investors should keep an eye on include the number of 3-8 year old cars on the road, because these account for the bulk of LKQ Corporation (NASDAQ:LKQ)’s business, falling scrap prices and higher whole vehicle auction prices (both pressure margins), and more information on the Chrysler patent deal. LKQ has the exclusive right to sell aftermarket parts on certain Chrysler models in exchange for a royalty payment, a similar deal to the one that it signed with Ford Motor Company (NYSE:F), and Albertine believes LKQ could be able to put together more patent deals with other automakers.