Due to the economy of the last few years and the dismal auto sales over that time span, the average age of the American car fleet is now at a record of 9.4 years. This bodes well for the auto replacement part business. One stock that is set to take advantage of this is O'Reilly Automotive.
O'Reilly Automotive Inc. (ORLY) – O'Reilly Automotive, Inc. operates as a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States. Its stores offer new and remanufactured automotive hard parts, including alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, chassis parts, and engine parts; maintenance items comprising oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives, and appearance products; accessories consisting of floor mats, seat covers, and truck accessories; and a line of auto body paint and related materials, automotive tools, and professional service equipment. The company's stores sell a selection of brand name and private label products for domestic and imported automobiles, vans, and trucks to do-it-yourself customers and professional installers.
Valuation – ORLY is selling at a little over 16 times this year's projected earnings and 14.5 times 2012's consensus EPS. O'Reilly has consistently and significantly beat earnings estimates over the last four quarters. Earnings estimates for both 2011 and 2012 have been raised in the last ninety days. ORLY has grown its earnings by an average of 15.5% over the past five years. Sales growth over the same time period has grown an even more impressive average of 22%. Operating cash flow has more than doubled over the past couple of fiscal years. Despite solid performance in earnings and revenue growth over the past five years, ORLY sells for a PEG of 1.
Catalysts and positive trends – O'Reilly has consistently grown even through the recession. This growth is likely to continue:
- ORLY opened 150 stores in 2010 and plans to open approximately 170 stores this year.
- O'Reilly's EPS should benefit from the implementation of better systems over the next two to three years.
- ORLY increased stock buybacks and acceleration of operating cash flow due to a recent refinancing should be reflected in EPS growth in 2011 and beyond.
- Comps were up 5.7% in the first quarter showing an impressive 100bps in its EBIT margin.
- These margins should continue to improve as it absorbs its CSK acquisition and achieves cost synergies.
- The company's strong cash flow and balance sheet allows the company to make strategic acquisitions. One possibility is Pep Boys whose performance has been improving and would allow O'Reilly to build a service business as PBY has 7,000 service bays.
Price Target – Given its consistent growth in earnings and revenues, improving margins, and the secular trend in the auto replacement part business; ORLY deserves a higher multiple. My price target is $72 for O'Reilly or 18 times 2012's consensus EPS of $4. Credit Suisse has a price target on this equity of $80.