Playing Defense: O'Reilly Automotive

Posted on October 10, 2011 by Ben Connard

 

We recently purchased O’Reilly Automotive (ORLY) for many client accounts. ORLY operates auto parts stores in the Unites States supplying do-it-yourself customers and professional mechanics and service technicians with automotive aftermarket parts.

ORLY has stores throughout the U.S. except for the mid-Atlantic and Northeast regions. Its two largest competitors, AutoZone and Advanced Auto Parts, are similar in size and together the three companies control about a third of the market. The market continues to consolidate. The dominant players have an operations advantage due to their ability to source parts from the manufacturers more cheaply and deliver parts quicker and at a lower cost because of their larger supply networks.

We believe ORLY is the strongest of the three because of its larger share in the steadier professional market, stronger balance sheet and experienced management team.

The automotive aftermarket industry interested us for a few reasons. One is the general aging of vehicles in the U.S. Fewer cars are being sold today than 6 years ago—in 2005, 17.5 million were sold and the September estimates are for an annualized rate of 13 million. Cars are lasting longer and economically constrained consumers are opting not to replace their vehicles at the same rate. Another reason is that, while recent high gas prices and unemployment have slowed the growth in total miles driven, there is still a general upward trend.

Additionally, the automotive aftermarket companies all performed relatively well during the last downturn because car maintenance is a necessary evil and still cheaper than buying a new car, which is even more important in today’s economic environment. According to various estimates, a car depreciates on average about $5,000 to $8,000 in the first year. I spent about $32,000 on a new Kia Sorento in May. On Cars.com, a 2011 Kia Sorento with 12,000 miles is selling for $25,000. My Kia will depreciate $7,000 in the first year.

Seven thousand dollars is much less than the scheduled maintenance. According to Edmunds.com, the average scheduled maintenance on a car for the first 100,000 miles (about 8 years) is between $1,500 and $2,800 total. You can maintain your vehicle for much less than the annual depreciation. Over an 8 year period, a new car cost estimate is $32,000 plus $2,400 for regular maintenance, or about $34,400. So the “annual” cost is about $4,300. In other words, putting $4,300 into your old car is actually smarter than buying a new car.

This economic decision results in strong sales for the automotive aftermarket in any macro environment, even today’s tough environment. In summary, we feel ORLY is in an industry that has strong growth drivers and is in the best position to take advantage of the market and competitors.