Is O'Reilly a Buy After Being Revved Up?

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

O'Reilly Automotive (NASDAQ: ORLY) was up over 9% on the news that the auto parts company posted record earnings. After the run up, is there room for the stock to go higher? Quite possibly, but the better bet on the auto parts industry might be one of its peers, AutoZone (NYSE: AZO)

O'Reilly posted posted EPS of $1.14, compared to $0.94 from a year ago, and above analysts' estimates of $1.08. The details of the earnings beat included same store sales growth of 4.2% year over year for the quarter (check out how hedge funds are trading O'Reilly).

What got a number of investors excited was the fact that the company expects to post $5.57 to $5.67 of earnings per share for 2013, compared to previous analysts' expectations of $5.52. While the outlook boost is positive for the industry, the stock run-up may have put O'Reilly in over valuation territory, but still leaves the door open for other major auto parts retailers that are yet to announce earnings. 

Other major peers include U.S. Auto Parts, The Pep Boys (NYSE: PBY) and Advance Auto Parts (NYSE: AAP)US Auto Parts reported its 3Q results that showed net sales down, but its net loss narrowed from $5.2 million a year ago, to a loss of $2.5 million. This retailer is much smaller than its peers, trading with a sub $100 million market value. The online auto parts retailer has also seen its stock pushed down by almost 60% the last twelve months after missing earnings estimates badly over the last four quarters. 

Meanwhile Pep Boys posted 3Q results that included an EPS loss of $0.13, on the back of a 2.7% drop in same store sales. Pep Boys had traded near $15 per share during the second quarter of 2012 after a buyout bid from Gores Group. However, the bid fell apart and the stock tumbled to below $8.70. The auto parts retailer has slowly been rebounding, now trading above $11. Unlike other auto retailers, Pep Boys has a largest dependence on service revenue. Advance Auto Parts also recently posted earnings, outperforming by posting EPS of $0.88 compared to expectations of $0.75. Revenue was flat, despite an almost 2% decline in same store sales. 

Back to O'Reilly, its store locations appear to be rather clustered, with around 30% of its stores in Texas and California. AutoZone has been using its cash flow to expand and grow square footage, opening over 70 stores in the U.S. and over 20 in Mexico. AutoZone's recent earnings showed a 15.6% rise in earnings per share to $5.41, up from $4.68 during the same quarter a year ago. So let's see why AutoZone is the best opportunity in the industry. 

IBISWorld estimates the auto parts to be a $40 billion industry, in which AutoZone is the market share leader: 

<table> <tbody> <tr> <td> <p>($ in billions)</p> </td> <td> <p><strong>Revenues</strong></p> </td> <td> <p><strong>Estimated Market Share</strong></p> </td> </tr> <tr> <td> <p>AutoZone</p> </td> <td> <p> $8.60</p> </td> <td> <p>22%</p> </td> </tr> <tr> <td> <p>Advance Auto Parts</p> </td> <td> <p> $6.20</p> </td> <td> <p>16%</p> </td> </tr> <tr> <td> <p>O'Reilly</p> </td> <td> <p> $6.18</p> </td> <td> <p>15%</p> </td> </tr> </tbody> </table>

 

AutoZone is cheaper than O'Reilly:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Price to Sales</strong></p> </td> <td> <p><strong>Price to Operating Cash Flow</strong></p> </td> </tr> <tr> <td> <p>O'Reilly</p> </td> <td> <p>1.96</p> </td> <td> <p>16.7</p> </td> </tr> <tr> <td> <p>U.S. Auto Parts</p> </td> <td> <p>0.17</p> </td> <td> <p>13.2</p> </td> </tr> <tr> <td> <p>AutoZone</p> </td> <td> <p>1.67</p> </td> <td> <p>12.5</p> </td> </tr> <tr> <td> <p>Pep Boys</p> </td> <td> <p>0.29</p> </td> <td> <p>5.7</p> </td> </tr> <tr> <td> <p>Advance Auto Parts</p> </td> <td> <p>0.93</p> </td> <td> <p>10.0</p> </td> </tr> </tbody> </table>

 

Although AutoZone isn't the cheapest auto parts retailer in the industry, it doesn't have to be, as AutoZone has some of the best returns and profitability in the industry: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Return on Sales</strong></p> </td> <td> <p><strong>Operating Margin (TTM)</strong></p> </td> </tr> <tr> <td> <p>O'Reilly</p> </td> <td> <p>9.50%</p> </td> <td> <p>15.80%</p> </td> </tr> <tr> <td> <p>U.S. Auto Parts</p> </td> <td> <p>-3.80%</p> </td> <td> <p>-2%</p> </td> </tr> <tr> <td> <p>AutoZone</p> </td> <td> <p>10.80%</p> </td> <td> <p>19%</p> </td> </tr> <tr> <td> <p>Pep Boys</p> </td> <td> <p>1.10%</p> </td> <td> <p>1.40%</p> </td> </tr> <tr> <td> <p>Advance Auto Parts</p> </td> <td> <p>6.30%</p> </td> <td> <p>10.60%</p> </td> </tr> </tbody> </table>

 

Don't be fooled

The overwhelming positive for the industry is the rising age of cars on the road, which has reached 11 years. The large number of 'old' cars should continue to drive the demand for auto parts and services. So which auto parts company is the best buy? Although AutoZone is not the cheapest in the industry, it is one of the best with regards to profitability and return generation, not to mention cheaper than O'Reilly. AutoZone's price to earnings ratio of 12.5 is also on the low-end of its 5-year range (low of 10.6 to high of 18.6). Investor's don't have to completely rule out O'Reilly, as it may well be one of the top five picks for 2013 (check out all five). Billionaire Jim Simons also took a new position in O'Reilly during the third quarter (check out Simon's top picks), but I continue to like AutoZone better.

 


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