Company Reports

With over 6,000 stores across the United States, O’Reilly boasts a resounding presence in the highly fragmented automotive aftermarket. The retailer greatly expanded its footprint in the do-it-yourself subset of the aftermarket via its acquisition of CSK in 2008, and we estimate the firm currently holds a low-double-digit percentage share of the DIY market, second only to AutoZone. Despite facing copious competition from online channels and diversified retailers, O’Reilly’s value proposition is predicated in its knowledgeable staff and ample product availability. Contrary to most non-pure-play auto parts retailers, O’Reilly’s staff assists customers with vehicle diagnosis, the ordering of parts for a specific vehicle’s make and model, and testing the functionality of parts. Given auto repairs are often nondiscretionary and, in some instances, time sensitive, we surmise consumers value the level of expertise provided by O’Reilly’s staff. Furthermore, the firm’s hub-and-spoke supply chain model and favorable supplier relationships provide it with significant localized distribution capacity. As such, the firm is able to quickly distribute products across its local store base to meet time-sensitive consumer demand. We view the firm’s levels of customer service and convenience as difficult to replicate and valuable to customers, allowing O’Reilly to consistently deliver a gross margin in excess of 50%.

Wide-moat O’Reilly’s first-quarter results came in slightly below our expectations as comparable sales growth of 3.4% lagged our 4.5% estimate and operating margin declined 40 basis points to 18.9%. However, our confidence in the firm’s growth trajectory and margin profile is intact as we acknowledge that the auto-parts retailer was lapping a difficult 11% growth figure from last year. Ongoing operational investments in technology and stores contributed to near-term margin degradation, though we expect these costs to abate over time and were impressed by the firm’s 51.2% gross margin (up 20 basis points annually). We expect O’Reilly’s financial marks to improve as the year progresses and continue to forecast mid-single-digit comp growth and operating margin that slightly exceeds 20% in fiscal 2024, closely aligning with management’s reaffirmed outlook. Our long-term outlook remains intact, and we believe O’Reilly enjoys a durable competitive edge that primarily stems from superior product availability, expertise, and speed of service. With a vast hub-and-spoke distribution network and favorable supplier relationships, the firm’s status as a leading auto-parts retailer is well cemented, in our opinion. We plan to slightly raise our $780 fair value estimate primarily due to the time value of money but view shares as overvalued.

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.

With over 6,000 stores across the United States, O’Reilly boasts a resounding presence in the highly fragmented automotive aftermarket. The retailer greatly expanded its footprint in the do-it-yourself subset of the aftermarket via its acquisition of CSK in 2008, and we estimate the firm currently holds a low-double-digit percentage share of the DIY market, second only to AutoZone. Despite facing copious competition from online channels and diversified retailers, O’Reilly’s value proposition is predicated in its knowledgeable staff and ample product availability. Contrary to most non-pure-play auto parts retailers, O’Reilly’s staff assists customers with vehicle diagnosis, the ordering of parts for a specific vehicle’s make and model, and testing the functionality of parts. Given auto repairs are often nondiscretionary and, in some instances, time sensitive, we surmise consumers value the level of expertise provided by O’Reilly’s staff. Furthermore, the firm’s hub-and-spoke supply chain model and favorable supplier relationships provide it with significant localized distribution capacity. As such, the firm is able to quickly distribute products across its local store base to meet time-sensitive consumer demand. We view the firm’s levels of customer service and convenience as difficult to replicate and valuable to customers, allowing O’Reilly to consistently deliver a gross margin in excess of 50%.

We are placing narrow-moat O’Reilly Automotive under review as we reassess its long-term competitive standing and the assumptions that underpin our fair value estimate. The firm has been a stalwart in the industry, and we think this could enable it to withstand looming competitive challenges—particularly as the penetration of electric vehicles grows—better than we previously expected.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 36% 2020-22 average).

We expect to increase our fair value estimate of $700 per share by a low-single-digit percentage for narrow-moat O’Reilly after the company reported strong third-quarter results highlighted by robust top-line growth. Over the last three months, shares have declined by about 4%, better than the Morningstar US Market Index’s 9% decline and worse than narrow-moat AutoZone’s 1% decline. Still, shares look overvalued, as we think the current price sets a lofty bar for even the best operator in the sector in O’Reilly.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 36% 2020-22 average).

We expect little change to our fair value estimate of $680 per share for narrow-moat O’Reilly after it announced second-quarter results highlighted by continued strong performance. Same-store sales were up 9%, slightly slower than the first quarter’s 11% growth but still much faster than the roughly 4% in the year-ago quarter. As was the case in the first quarter, the company saw double-digit growth in the professional segment, which we believe reflects its superior distribution apparatus and the industry’s insulation from macroeconomic volatility. Shares were down about 4% after the earnings release, which we think reflects the sky-high expectations the market has placed on O’Reilly. Thus, despite our view that it’s the best-positioned national retailer with its robust dual-market approach, shares are priced for perfection and look overvalued to us.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 36% 2020-22 average).

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 36% 2020-22 average).

Our $670 per share valuation of narrow-moat O'Reilly should not change much after the company announced a strong start to 2023, with first-quarter comparable sales rising nearly 11%. The professional segment drove growth, with sales up more than 20% as the company capitalized on its superior distribution architecture and part availability. The quarter reinforces our view that O'Reilly leads an industry fairly insulated from economic turbulence, and our long-term forecast (mid-single-digit percentage annual sales growth and low-20s adjusted operating margins) is intact. Despite our favorable view, we suggest investors await a more attractive entry point as the shares' current trading price affords little room for error.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 36% 2020-22 average).

We don’t expect to materially alter our $640 fair value estimate for narrow-moat O’Reilly as we weigh strong fiscal 2022 results against a higher-than-anticipated operating expense outlook for fiscal 2023.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 34% 2020-21 average).

We plan to lift our $600 per share valuation of narrow-moat O'Reilly by a mid-single-digit percentage after it posted strong third-quarter earnings (including 7.6% comparable growth) that leave it tracking above our full-year expectations. Our long-term forecast still assumes mid-single-digit percentage annual sales growth and low-20s adjusted operating margins. With the shares trading higher by a similar percentage after the news as our planned increase, we suggest investors await a more attractive entry point.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 34% 2020-21 average).

Our $580 per share valuation of narrow-moat O’Reilly should not change much after it announced second-quarter earnings, with somewhat lackluster performance (particularly in its DIY unit) offset by the time value of money. Our long-term forecast still incorporates mid-single-digit percentage top-line growth and low-20s adjusted operating margins. We suggest investors await a more attractive entry point.

As the most fully realized exemplar of the dual-market (commercial and do-it-yourself) approach to auto-part retail, narrow-moat O’Reilly has capitalized on favorable industry dynamics to achieve strong returns. The firm has profited from increases in miles driven and average vehicle age as well as the benefits of its expansive distribution network in ensuring part availability, leading to adjusted returns on invested capital that have grown more than 900 basis points since 2010, to 22% in 2019 (before a pandemic-related surge led to a 34% 2020-21 average).

We have a more sanguine view of narrow-moat O’Reilly’s first-quarter results than market sentiment, planning no large change for our $570 per share valuation despite the stock’s low-double-digit percentage plunge in response to the report. O’Reilly’s 4.8% comparable growth (29.6% two-year stack) leaves it poised to approximate our 5% full-year target, and we see little reason to change our long-term expectations (mid-single-digit percentage annual top line growth, low-20s adjusted operating margins). We had been conservative with our 2022 estimates considering difficult comparisons (15% revenue growth last year) and sharply higher fuel costs, and note that O’Reilly’s opening quarter tends to be affected by weather (while snowstorms can boost demand over the year as vehicle wear and tear rises, they can mute first-quarter results as motorists stay home). We believe these factors underlie our differentiated response. But despite the trading swoon, we suggest investors await a more attractive entry point before building a position, as O’Reilly’s best-in-class position does not render it invincible.