Is O’Reilly Automotive Inc (NASDAQ:ORLY) a good stock to buy?
Vulcan Value Partners‘ third quarter investor letter is out, and the fund has apparently purchased four new positions for the period. Among the four stocks the fund bought is O’Reilly Automotive Inc (NASDAQ:ORLY), which is one of the largest auto parts distributors in America. In terms of its segments, it makes roughly 60% of its sales from the do-it-yourself segment and 40% from the do-it-for-me sector.
Given that do it yourself customers mainly repair their own cars and trucks out of necessity, the availability of parts and the expertise of sales people is really important to that segment, and that’s where O’Reilly stands out in terms of its offering. Meanwhile do it for me customers are mainly professionals like mechanics and garages who use O’Reilly Automotive Inc (NASDAQ:ORLY) for inventory on-demand. In terms of the stock, Vulcan Value Partners commented,
We believe the issues negatively impacting the auto parts supply industry are cyclical, not secular. Online sales are not a threat today because the need for parts delivery is immediate… The cycle affecting O’Reilly and its peers is related to the age of cars on the road. The company’s sweet spot is cars between five and ten years old. Typically, after five years car warranties expire and owners tend to take their cars to independent garages rather than dealerships for service. This car age cohort is depressed due to lower new car sales after the financial crisis. We expect this headwind to turn into a tailwind for O’Reilly in the coming years.
The fund also thinks another headwind has been rather milder weather in some parts of the country that has decreased demand somewhat. Given that the headwinds are not permanent, the fund concludes, ‘these temporary factors have given us an opportunity to buy O’Reilly Automotive Inc (NASDAQ:ORLY) at a discount to our estimate of its intrinsic value’. Shares of the stock are down around 23% year-to-date, but have rallied from their July lows.