Which Auto Parts Chain Is a Good Buy Now?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Shareholders of O’Reilly Automotive (NASDAQ: ORLY) have had a great time in the last five years. Since 2009, O’Reilly’s stock price has risen an incredible 366%, handily beating the S&P 500’s gain of only 34.60%. Recently, the company reported impressive second-quarter results. Famous investors, such as Joel Greenblatt, reduced their positions in O’Reilly in the first quarter 2013. Let’s take a closer look to determine whether or not O’Reilly is a good buy now.

O’Reilly's impressive second-quarter results

In the second quarter of 2013, O’Reilly managed to grow its revenue and net income. Revenue increased 10% from $1.56 billion in the second quarter last year to $1.71 billion this year. Net income came in at $177 million, 21% higher than net income of $146 million in the second quarter of 2012. The company’s EPS increased 37%, from $1.15 to $1.58, mainly due to share repurchase activities in the second quarter, as the share count fell from 124.87 million last year to 110.28 million this year. In terms of operating performance, comparable store sales growth was 6.5% in the second quarter, with the 170 basis points increase in its operating margin.

For the full year, O’Reilly expects to grow its comparable store sales 3%-5%, with total revenue of around $6.6 billion to $6.7 billion. Earnings per share are estimated to be around $5.79 - $5.89 and the free cash flow might come in at $450 million - $500 million in 2013. The company recently increased its share buyback program by $500 million, bringing the total cumulative authorization under the share repurchase program to around $3.5 billion. O’Reilly is trading at around $122.50 per share with a total market cap of around $13.50 billion. The market values O’Reilly at as much as 12 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).

How about AutoZone and Advance Auto?

Compared to its peers AutoZone (NYSE: AZO) and Advance Auto Parts (NYSE: AAP), O’Reilly is the most expensively valued. AutoZone is trading at $438.80 per share with a total market cap of around $15.60 billion. The market values AutoZone at a lower valuation at around 10.1 times its trailing EBITDA. Advance Auto has the cheapest valuation. At $81.40 per share, Advance Auto is worth around $6 billion on the market. The market values Advance Auto at only 7.45 times its trailing EBITDA.

All three companies enjoy market leading positions. AutoZone, with more than 5,000 stores, is the market leader. O’Reilly ranks second with more than 4,000 stores, while Advance Auto stands in the third place with more than 3,900 stores.

 

O'Reilly

AutoZone

Advance Auto

ROC (%)

40.3

76.6

49.8

Net debt/EBITDA

0.92

1.9

0.18

EBITDA multiple

 12

 10.10

 7.45

Dividend yield (%)

N/A

N/A

0.3

Indeed, with the leading position, AutoZone is the most profitable with the highest return on capital in 2012, at 76.60%, while O’Reilly has the lowest return on capital at only 40.30%. However, AutoZone has the highest leverage level at around 1.9 times its net debt/EBITDA. Advance Auto is the least leveraged business with a net debt/EBITDA of only 0.18. Moreover, among the three, Advance Auto is the only company that pays dividends. Although the dividend yield is quite small, at only 0.30%, but the payout ratio is quite conservative, at only 5%. Advance Auto could easily increase its dividend payout ratio to 30%, bringing the dividend yield to 1.80%.

Looking forward, O’Reilly expects to grow the market share in existing markets while expanding the business by opening 190 new stores in 2013. AutoZone would also grow its business by growing its retail sales using inventory more effectively across the business network. It also targets to capture commercial sales with the focus on building the best B2B sales organization. At the same time, AutoZone will keep managing costs to operate more efficiently. For Advance Auto, the company also expects some growth in the business in 2013 with modest gross profit improvement. Excluding its recent BWP acquisition, the company expects to generate around $375 million in free cash flow. The EPS is expected come in at $5.30 to $5.45 per share.

My Foolish take

All three seem to be good stocks for investors to hold in the long run. As the industry is quite fragmented, O’Reilly, AutoZone, and Advance Auto are in good positions to be the consolidators of the industry by acquiring smaller players. Personally, I like Advance Auto the most with its lowest valuation, the most conservative capital structure, and decent profitability. 

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Anh HOANG has no position in any stocks mentioned. The Motley Fool owns shares of O'Reilly Automotive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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