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
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.
Genuine Parts Company (NYSE:GPC) has been generatingconsistent cash flow in the past ten years. In 2012, it generated $906 million in operating cash flow and $804 million in free cash flow. Genuine Parts seems to employ the lowest financial leverage among the three, at only 2.27, while O’Reilly’s financial leverage ratio is 2.73. With nearly 5% net margin, the return on equity in 2012 was 22.42%.
Interestingly, although O’Reilly enjoyed the highest operating margin and net margin of 9.47%, its return on equity was the lowest at 16.38%. Advance Auto Parts, Inc. (NYSE:AAP) is valued the cheapest of the trio, at only 7.5 times EV/EBITDA, while O’Reilly and Genuine Parts Company (NYSE:GPC) have similar EV multiples at around 11.35. Income investors might like Genuine Parts the most due to its highest dividend yield of 2.60%. Advance Auto Parts offers a much lower dividend yield of only 0.30%, while O’Reilly has not paid any dividend yet.
My Foolish take
All three automotive parts retailers seem to be good stocks to own for the long-term because of their cash generating capability, reasonable leverage level, and double-digit returns on equity. I like Advance Auto Parts the most with its highest return on equity and the lowest EV multiple.
The article Which Automotive Parts Retailers Should Investors Buy? originally appeared on Fool.com and is written by Anh HOANG.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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