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O'Reilly Automotive: Strong Margins Provide Resilience In Downturn

Jun. 01, 2020 12:28 PM ETO'Reilly Automotive, Inc. (ORLY)1 Comment
Stefan Ong profile picture
Stefan Ong


  • O'Reilly has insulated itself from online disruption through strong customer service and investments in digital channels.
  • The company's cost advantages should allow it to maintain its operating margins when worse companies are losing money.
  • O'Reilly appears to be expensive, but the company has stronger forward estimates than peers.

O'Reilly Automotive Inc. (NASDAQ:ORLY) is a strong bet in an industry that is fairly resilient to online disruption. The company's service levels and omnichannel presence have insulated O'Reilly from falling sales growth experienced in the general retail industry. The company has also managed to maintain high operating margins by strengthening its relative scale against smaller peers. With these barriers of entry, O'Reilly should expect steady sales growth and operating margins going forward. At 16.5x forward EV/EBITDA, the company trades higher than peers but has better forward estimates due to robust advantages in place.

Service and availability have kept O'Reilly relevant

As more retail chains close down stores, one would expect that e-commerce will negatively impact the automotive aftermarket part industry. However, O'Reilly has opened 200 net, new domestic stores in 2019 and plans to open 180 net, new stores in 2020.

One key differentiator is the high customer service levels that O'Reilly provides. The company provides superior in-store service through highly-motivated personnel and enhanced service programs such as battery and electrical testing, wiper, and bulb replacement. These services are crucial to differentiate the company from online competition.

Furthermore, customers who find that their vehicles require servicing are sensitive to time. If their car or truck were defective, it is unlikely that they would wait for their online ordered parts even if there were one-day shipping. The likely customer behaviour would be to drive into a nearby auto part store and obtain their required item.

O'Reilly is also adopting an omnichannel approach

Customers are increasingly researching their purchases online before purchasing their products. Having a digital presence allows O'Reilly to offer their customers enhanced and seamless research and buying experience through any channel, be it in-store or online. It also provides a barrier of entry to O'Reilly's business as having both channels are very

This article was written by

Stefan Ong profile picture
Focused on buying high-quality businesses and holding them for the long term. My initial investment strategy was to buy dividend-yielding stocks and REITs to generate passive income. This changed recently as I have more time to study companies. Besides, finding businesses that can reinvest earnings and compound returns at a higher rate is much more rewarding.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (1)

quantsb profile picture
HD & LOW next on deck to report blow out SSS vs. consensus...

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