O’Reilly Automotive Inc (ORLY), AutoZone, Inc. (AZO): A Few Reasons Why This Stock’s Premium Valuation Is Justified

Page 1 of 2

Auto parts retailers have had a solid run this year with all the major players recording solid gains. However, O’Reilly Automotive Inc (NASDAQ:ORLY)’ is the one which takes the cake when it comes to share price appreciation and growth trajectory. The stock is up almost 27% so far this year, easily outperforming its peers and considering the moves it is making, I doubt that there will be any let up in its momentum.

O'Reilly Automotive Inc (NASDAQ:ORLY)

The stock’s rise this year has been helped by a couple of stellar earnings reports while its initiative to return cash to shareholders through buybacks is another positive. More importantly, what really adds to the allure of owning O’Reilly Automotive Inc (NASDAQ:ORLY) is its positive same-store sales growth, while peers such as Advance Auto Parts, Inc. (NYSE:AAP) and AutoZone, Inc. (NYSE:AZO) have been struggling with negative same-store sales.

Reading the trends

O’Reilly Automotive Inc (NASDAQ:ORLY) has positioned itself well to benefit from the high average age of vehicles on the U.S. roads, which is at 10.8 years. While sales of new vehicles might be picking up due to the housing rebound and consumers finally deciding to upgrade, it is unmistakable that vehicles require maintenance and routine maintenance of vehicles will lead to better revenue for the company going forward.

Moreover, management believes that the new vehicles being manufactured are superior in terms of engineering and manufacturing, and this should contribute to the long-term success of the aftermarket retailers. Also, the complexity in the engineering of the new vehicles means costlier parts that result in higher sales, and this was one of the reasons behind O’Reilly Automotive Inc (NASDAQ:ORLY)’s solid performance in the previous quarter.

Thus, a combination of older vehicles on the road and an increasing number of new, state-of-the-art vehicles indicates that aftermarket retailers aren’t going out of business and the positive outlook for new vehicle sales this year isn’t exactly a disadvantage for the likes of O’Reilly Automotive Inc (NASDAQ:ORLY). This makes companies in this sector a solid pick irrespective of the state of the economy as the older vehicles will ultimately require maintenance.

Delivering growth and value

To benefit from the rising number of vehicles on the road, O’Reilly Automotive Inc (NASDAQ:ORLY) has been aggressively opening stores and distribution centers. O’Reilly intends to open around 190 stores this year as it looks to expand its network and compete with the others. The company’s distribution centers have been contributing to its efficiency and leading to gross margin growth, leading it to bump up its gross margin guidance in its last quarterly report.

Page 1 of 2