This auto parts supplier is expected to announce earnings on February 10, with EPS estimated at $5.08 per share, on revenues of $2.77 billion.
O’Reilly Automotive, Inc. (ORLY)
From Investor Advisory Service
Long-term IAS name O’Reilly Automotive has been a relative beneficiary of the pandemic and we believe these positive results are set to continue. Auto parts retailers have traditionally done well in recessions as customers choose to repair cars instead of replacing them. Furthermore, stimulus payments have put more money in the pockets of consumers and boosted sales.
Early in the pandemic there was concern regarding fewer miles driven, but those proved to be outweighed by other factors. Despite what will be particularly strong 2020 results, O’Reilly looks well positioned to continue to grow in coming years as it benefits from market share gains and positive trends in miles driven and average vehicle age.
After starting with a single store in Springfield, Missouri, in 1957, O’Reilly has become one of the largest automotive parts aftermarket retailers in the U.S. The company’s 2020 sales are expected to be over $11 billion. As of the end of September, O’Reilly operated more than 5,600 stores, including 356 hub stores carrying an expanded selection of SKUs. These hub stores can provide timely delivery to other locations in the surrounding area. Also contributing to a very strong distribution network are the company’s 28 distribution centers.
O’Reilly claims to be the first company to have run a “dual market” strategy in the auto parts aftermarket, launching it approximately 25 years ago. It aims to provide excellent service and timely procurement of parts for both the Do-It-Yourself (DIY) customer, about 55% of sales, and professional service providers, which contribute the remaining 45% of sales. The cost and service advantages from its store and distribution network help with continued share growth among both DIY customers and professionals.
Growth over the years has been a combination of opening new stores, growing sales within its existing locations, and acquisitions. O’Reilly has been adding about 200 stores per year, roughly 3%-4% growth on its store base. Due to the pandemic, store openings were modestly lower in 2020, but 2021 is likely to see a resumption of historical store growth. Management has in the past highlighted the potential for 6,500 stores domestically, leaving room for approximately five years of growth at the current pace. However, this appears to be a moving target as it more recently indicated total capacity in the U.S. is “yet to be determined.”
Aided by its dual market strategy, O’Reilly routinely outperforms competitors’ comparable store sales growth metrics. For 2018-19, comparable store sales grew approximately 4.0%, before jumping to nearly 11% through the first three quarters of 2020. Longer-term it looks reasonable to expect 3%-5% comparable sales growth.
Even after years of consolidation, the retail automotive parts aftermarket remains relatively fragmented. O’Reilly has a history of acquiring smaller chains to help fuel its growth and we expect this to continue, though at a slower pace.
At the end of 2019, the company made its first international acquisition with its purchase of Mayasa Auto Parts, a family-run business in Mexico. International acquisition could help expand O’Reilly’s opportunity and the company has not been shy in expressing its interest in finding the right partners in both Mexico and Canada.
Like any other brick-and-mortar store, eCommerce is a risk to O’Reilly. Concerns regarding online competition have surfaced from time to time but have largely proven to be overblown. The company has spent years developing its supply chain to quickly respond to the needs of its customers and provide timely access to a broad range of products, which is a key competitive advantage. Furthermore, the company’s customers benefit from technically proficient store personnel. O’Reilly also continues to make technology investments to more easily support its customers’ needs online.
As noted, year-to-date results in 2020 have been strong. The company benefitted earlier in the year from a combination of cost cuts in response to the pandemic and stronger-than-anticipated demand, leading to meaningful margin expansion. Though O’Reilly has yet to report Q4 results, consensus expectations are for nearly 30% EPS growth for the year.
Strong 2020 performance will make for a challenging comparison in 2021 but we believe the drivers for growth over the next several years remain intact. Combining expected 3%-4% same-store sales growth with new store growth and acquisitions, we expect total sales growth of approximately 6%. Management believes it can leverage its expense base at comparable store sales growth of roughly 2.5%-3%, which should lead to continued margin expansion opportunities. Furthermore, strong free cash flow has made share repurchases an important part of O’Reilly’s capital allocation strategy. Historically the company has retired approximately 4% of its shares annually.
Assuming average annual EPS growth of 11% implies EPS of $37.73 after five years. When combined with an average high P/E of 25.6, shares could reach 966. To get the low price estimate of 308, we combine 2019’s EPS of $17.88 with the average low P/E of 17.2. This equates to an upside/downside ratio of 3.1 to 1 and potential and compound annual return of over 15%.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, February 21, 2021