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O’Reilly Automotive Inc (ORLY), Advance Auto Parts, Inc. (AAP), Genuine Parts Company (GPC): Which Automotive Parts Retailers Should Investors Buy?

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I am always looking for businesses which compound capital at very high rates over a long period of time. In the long run, such businesses enjoy significant appreciation in share price. Recently, I came across a stock that has kept going up in the past ten years, from around $15 per share to nearly $111 per share. That stock is O’Reilly Automotive Inc (NASDAQ:ORLY).

Interestingly, this stock is also in the portfolio of successful value investor Chuck Akre. As of March 2013, he owned 823,683 shares in the company, accounting for 4.8% of his total portfolio. Should we invest in O’Reilly Automotive Inc (NASDAQ:ORLY) at its current price? Let’s find out.

Consistent growth

O'Reilly Automotive IncO’Reilly Automotive Inc (NASDAQ:ORLY) is considered one of the biggest specialty retailers of automotive aftermarket parts, tools, and equipment, operating nearly 4,000 stores in 42 states in the U.S. The company sources its products from more than 500 vendors, with the top five vendors accounting for 25% of its total 2012 purchases.

In the past ten years, O’Reilly Automotive Inc (NASDAQ:ORLY) has been growing quite fast, growing its number of stores from 1,109 in 2003 to 3,976 in 2012. Total square footage has increased from 7.5 million to more than 28.6 million. What I like about this specialty retailer is its consistent positive growth in its same-store sales. Since 2003, same-store sales growth has been fluctuating in the range of 1.5% to 7.8%. In 2012, its same-store sales growth was 3.8%.

Along with the retail operational data, revenue and net income have experienced decent growth as well. While revenue increased from $1.5 billion in 2003 to nearly $6.2 billion in 2012, its net income rose from $100 million, or $0.92 per share to $586 million, or $4.75 per share. Moreover, O’Reilly Automotive Inc (NASDAQ:ORLY) has really been a cash cow, growing its free cash flow from $36 million to $951 million in the past ten years.

O’Reilly Automotive Inc (NASDAQ:ORLY) employs a reasonable amount of leverage in its operations. As of March 2013, it had more than $2 billion in equity, $205 million in cash, and more than $1 billion in debt. With that historical operating and financial performance, investors might not expect the market to value the company cheaply. Indeed, the company is valued at 11.35 times EV/EBITDA on the market.

Is O’Reilly a good buy now? Or its peers are better buys?

Compared to its peers Advance Auto Parts, Inc. (NYSE:AAP) and Genuine Parts Company (NYSE:GPC), O’Reilly has the highest operating and net margin. While O’Reilly has an operating margin of 15.72%, the operating margins of Advance Auto Parts, Inc. (NYSE:AAP) and Genuine Parts Company (NYSE:GPC) are 10.6% and 7.8%, respectively.

Advance Auto Parts, Inc. (NYSE:AAP) has a long history but lower number of stores than O’Reilly. It was founded in 1929 and is operating 3,794 stores. Most of its revenue, or 64% of the total 2012 revenue, was generated from sales of Parts and Batteries while Accessories ranked second, accounting for 14% of the total revenue. Chemicals and Oil products represented around 11% and 10%, respectively, of total 2012 sales.

Advance Auto Parts, Inc. (NYSE:AAP) is also a cash cow. In 2012, it generated $685 million in operating cash flow and $414 million in free cash flow. The 2012 net margin came in at 6.25%, but because of the high financial leverage of 3.8, the return on equity was high at 37.66%.

Genuine Parts Company (NYSE:GPC) is also a distributor of automotive and industrial replacement parts, operating around 2,000 locations in the U.S., Canada, and Mexico. Most of its revenue, $6.32 billion, or 48.6% of the total 2012 revenue, was generated from the Automotive segment while the Industrial segment ranked second with $4.45 billion in sales. Those two segments were also the two biggest operating profit contributors, with $540.7 million and $352.1 million, respectively, in operating profit.

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