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  • Ted Vailas

O'Reilly Automotive - Auto Parts Are More Essential Than New Cars (Transcript)

Welcome to episode 18. Today we will talk about O'Reilly Automotive Incorporated, which trades on the NASDAQ stock exchange under the ticker symbol ORLY. Before we get started, make sure you check out our website at StockMarketIdeasPodcast.com. There you can take a look at several research tools I use, as well as a performance page that tracks the stock price for each company I discuss from the date the episode is published. That's at StockMarketIdeasPodcast.com. Alright, let's get started.


Thank you very much for joining me today. Today I'm very excited to get into O'Reilly Automotive. I've written about and discussed in the past about aftermarket auto parts and a little bit about the auto industry itself. Recently, I saw a little bit of an opportunity to talk about O'Reilly currently selling for a price of around $455 per share, and we'll get into valuation in a minute.


If you have not heard of O'Reilly Automotive, it's a US-based auto parts retailer that sells aftermarket parts, tools, supplies, etc to both professional auto shops as well as the do-it-yourself customers fixing and improving cars on their own. The company has been around since the 50s and has grown two become one of the largest auto parts retailers with over five and a half thousand locations. Competitors include Advance Auto Parts, Pep Boys and others.


Two well-rated Wall Street analysts that have given a buy rating to this company within the last two months include Brian Nagel at Oppenheimer and Scot Ciccarelli at RBC Capital. Motley Fool blogger Rick Munarriz, who happens to have a very good record on many of his bullish articles, distinguishes the aftermarket auto parts business and the rest of the automobile industry. In his view - and I will link to his article on my website - and others have also said this, aftermarket automotive parts are not tied to the cyclical nature of new car sales that rely on a buoyant economy. In fact, while new car sales may struggle in a mixed-bag economy, aftermarket parts are always needed to keep old and newer used cars on the road.


If we get into a couple of the fundamentals that stand out, we can see right away that profit margins are solid at O'Reilly. What is also notable is that there is a long-term trend of expanding gross and operating margins, the former being at about 53%, and the latter at over 20% on a trailing twelve-month basis.


Another very notable item is the long-term growth in Revenue. While many prominent companies can show dramatic growth over a year or just a few years, O'Reilly gives us many years of consistent Revenue growth that offers very little sign of slowing down or declining.


While there are great reasons to be optimistic, there are a couple of things to watch. The first includes the long-term debt being issued with over 1.7 billion dollars over the past three years being added to the balance sheet. This isn't overly concerning as net income and free cash flow have been strongly positive for many years. Some may feel that inside or selling is also a negative, but there does not appear to be any unusual spike in selling compared to previous years. This is also completely understandable as the stock price is near all-time highs on a long-term historical basis.

(Source: GuruFocus page for O'Reilly Automotive)


The price to earnings ratio is just above 20, and this is slightly lower then the average PE going back ten years. Given this company's profitability and growth record, it's perfectly reasonable to feel the stock is somewhat undervalued as a long term investor.


Overall, the feeling that I get from this company is that while it is not a screaming bargain, it does appear to be a high-quality company that will do well in the coming years. The auto industry is probably more unpredictable than it used to be. Still, new car sales will continue to be tied to overall economic cycles, while the parts, tools and aftermarket service equipment will continue to be in demand as long as vehicles are on the road. That, I don't see going away anytime soon, even as many of us work from home and leave the house less than we would like these days.


Again don't forget to check out our website at www.StockMarketIdeasPodcast.Com. I hope you found this helpful. Have a fantastic day and bye for now.

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