The $215B 'aftermarket' for auto parts hasn't shown the slightest decline despite a battered auto market. This is good news for specialty outfit O'Reilly Automotive (ORLY), writes Barron's, whose shares could jump 50% thanks to strong market positioning.
Auto parts are used for maintenance and repair, a growing sector as cash-strapped Americans try to fix their old cars instead of buying new ones. Another plus for the auto parts stores is that their products are less discretionary than other retail purchases; drivers can delay vehicle maintenance, but ultimately need to bring their autos in to the shop if they want their vehicles to perform well. O'Reilly CEO Greg Henslee says American motorists could be up to $60B behind in their maintenance, so some chains should see a jump in business later this year.
O'Reilly's is the most appealing company in the field. Though smaller than some of its rivals, it has two main advantages:
1)Around 50% of its revenue at core stores comes from commercial sales, a higher rate than most of its rivals. Commercial sales are less cyclical than consumer spending.
2) The company should benefit from last summer's $1B acquisition of CSK Auto, another parts retailer. Though not all investors warmed to the deal at the time, integration is going faster and better than expected. It also allowed O'Reilly to add 1,342 stores in 22 states, a nearly 85% increase from O'Reilly's previous 1,774-store network, and many of the new locations are in the western U.S. where O'Reilly hadn't been well-represented.
O'Reilly is on course for full-year earnings of $1.56/share vs. $1.68 in 2007. But for the new year, Cid Wilson of investment firm Kevin Dann & Partners, sees profits up 20% to at least $1.90.
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- Ryan Barnes sees O'Reilly as 'a compelling two to three year holding,' calling the CSK acquisition a 'perfect fit geographically' and citing Orly's recent outpacing of both rivals and the general market.
- O'Reilly Automotive: Q4 EPS of $0.40 in-line. Revenue of $1.11B (+67.9%) vs. $1.13B. (PR)
