O’Reilly: Robust Distribution and Growth Outlook Yields Increase to Fair Value Estimate, Wide Moat

After reviewing O’Reilly’s competitive standing, we are upgrading the firm’s moat rating to wide, from narrow, as we have more confidence in its ability to generate excess economic returns for 20 years. As demand for auto parts tends to be inelastic and time sensitive, we think O’Reilly boasts a unique ability to promptly serve its do-it-yourself and professional customer base due to its established hub-and-spoke supply chain model and strong supplier relationships that give the firm an edge as it pertains to local product availability. We further surmise that O’Reilly leverages its scale to negotiate favorable volume-based discounts with its suppliers, yielding a cost advantage. Taken with an aging vehicle fleet predominantly powered by internal combustion engines, we think O’Reilly is well positioned to benefit from strong underlying demand for aftermarket auto parts while taking market share from its fragmented competitive set. As such, we raised our fair value estimate on O’Reilly by about 8% to $780 per share, from $720 previously, due to the moat upgrade and an increase in our comparable-sales-growth forecast to 3.5%-4.0%, from an average of about 3.0% prior. Still, shares trade at about a 30% premium to our fair value estimate.