If you had invested $US10,000 ($14,000) in O’Reilly Automotive (NASDAQ: ORLY) shares in April 2018 when the share price was $US222, your investment would have grown to around $US18,400 by mid-April this year.
Even after the late April dip back to the $US380 region, you would still be sitting on a gain of some 70%.
So what’s behind this impressive move? In this age of heated debate on the merits and promise of electric vehicles, how does an auto parts company like O’Reilly keep growing?
What it does
O’Reilly was founded as a family business in 1957. It started with one store in Springfield, Missouri, in America’s mid-West.
The company provides new and re-manufactured hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, temperature controls and chassis parts.
In short, it’s your one-stop-shop for almost everything you need to maintain or improve your car.
From its humble beginnings, the company completed its initial public offering (IPO) on April 23, 1993. With an aggressive growth and expansion plan, the management team has embarked on a series of mergers and acquisitions including:
- January 30, 1998 – O’Reilly merged with Hi-Lo Auto Supply, adding 182 auto parts stores in Texas and Louisiana.
- April 25, 2000 – purchased KarPro Auto Parts, which included a 6100 square metre distribution centre in Little Rock, Arkansas, and 14 KarPro stores.
- October 1, 2001 – acquired Mid-State Automotive Distributors, adding 82 auto parts stores in seven states.
- May 31, 2005 – purchased Midwest Automotive Distributors, adding 72 retail locations.
- July 11, 2008 – completed the largest acquisition in its history with the purchase of CSK Auto, adding 1273 stores in 12 states.
As of February 2019, O’Reilly operates 5200 stores in 47 states. And if you go by its expansion plans and its management focus on growth, it won’t be a surprise to see 200 new O’Reilly stores opening in 2019, as outlined by the company.
With over 4900 stores and $9.5 billion in annual revenues, O’Reilly has evolved into an auto parts behemoth in the US.
What analysts are saying
A recent report from Directors Talk Interviews showed that currently there are 18 analysts covering O’Reilly. The consensus rating is “buy” with a target share price range of $US425 to $US353 and an average of $US394.94.
One automotive industry analyst said: “O’Reilly Automotive demonstrates strong business advantages. The company has a stable growth trajectory, well-situated financials, and the stock makes for a promising long-term investment.”
Investment house JP Morgan has also added O’Reilly to its focus list, saying O’Reilly will benefit most among auto parts retailers from cold weather trends in 2019.
Bright industry outlook
According to market research firm Statista, in 2017 US motor vehicle and parts retailers generated revenue of around $US100 billion.
One may think that with all the debate about the merits of electric vehicles and the growth of this sector, the automotive industry may be feeling the pain. However, the reality appears to be quite different.
Americans are known for their love of driving. Given the country’s geographical expanse, it is no wonder that companies like O’Reilly enjoy an ongoing demand for their products and services.
If we focus on the US auto parts industry, reports show that O’Reilly and AutoZone (NYSE: AZO) remain the market leaders in terms of comparable store growth, margin expansion and revenue growth.
The two retail titans exhibit similar performance, according to analysts.
However, based on market analysis and company reviews, O’Reilly appears to be best positioned given its lower debt, high margins and elevated revenue expansion rate.
From an investor’s point of view, auto part retailers offer significant investment appeal. Why is that? This industry is considered a consumer defensive business. It is also known for its resistance to market share erosion and formidable share price appreciation.
What’s driving the growth
From its one-store beginnings, O’Reilly now boasts a diverse product line, supplying new and re-manufactured parts, maintenance items and a full line-up of tools and service equipment.
Its clients range from do-it-yourself consumers to professional service mechanics and technicians.
Looking at company financial reports, it is obvious that O’Reilly has managed to produce sustained and consistent revenue expansion for the past couple of decades, largely due to the consistent revenue generation of auto parts.
The auto parts sector benefits from a number of positive factors such as an increasing consumer preference for used vehicles, deteriorations in the economy and overall compulsory demand for auto supplies.
Regardless of new technologies or disruptions in the auto market, consumers will continue to need essential items such as batteries, oil, oil filters, spark plugs, windshield wiper fluid, windshield wipers, car mats, headlights, etc.
Another key factor in O’Reilly’s growth is the fact that its revenue-generation model is based on compulsory transportation needs as opposed to consumer discretionary income, making the revenue highly stable in spite of economic fluctuations.
Share price movement
Looking at O’Reilly’s share price over the past six months, we saw it dip briefly below $US320 at the end of October 2018 before lifting to consolidate for nearly three months between highs in the region of $US360 and support around $US330.
A decisive break to the topside in early February saw a firm leg-up to $US388 followed by further gains in April that extended to an all-time-high close of $US408.67 on April 15, with an intraday high of $US414.63 on April 16.
Although the price dipped back below $US380 in late April, the broader underlying upward trend remains firmly in place. Good support remains in the region of $US360 to US$330.
Considering the well-documented growth and expansion plans and recent analyst reviews, it looks as if O’Reilly may continue to deliver for its clients as well as investors.
While prices remain above US$330 we see it as a buy.
This article was written by Alex Douglas, Managing Director of Monex Securities Australia (AFSL: 363 972), part of the Monex Group Inc. and published by Money Magazine (https://moneymag.com.au) on 1/05/2019
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