Rushi Shah on O'Reilly Automotive Inc. (ORLY) until Sep 03, 2012

Conventional and intuitive analytical insight suggests that when economy drags consumers don’t like to make big-ticket purchases. Usually car purchases are a luxury and consumer decisions are directly dependent on consumer confidence and consumer confidence depends on variety of cyclical factors such as employment rate, recessionary pressures and consumer spending. Now when U.S. consumers scale back on spending on new cars, they still have to maintain their existing cars to look for jobs, interview for jobs or to continue to go to work. When cars break consumers visit stores like O’Reilly to purchase parts to keep up with their existing vehicles. During periods of economic drag consumers tend to drive older car for longer and fix them more often. Cars 8 to 11 years old need batteries at four times the rate of cars that are 3 years old or younger. In older vehicles, headlamp bulbs need replacement at three times the rate and wiper blades at twice the rate of younger cars. New car sales were down by 35% from 2007 to 2009, largest two-year drop since inception of tracking this statistic. O’Reilly’s store count grew from 3,415 to 3,536 since last year, when same-store sales were also up by 5.3 percent during the same period. The average age of vehicles driven in the U.S. continues to increase as new vehicle sales have stopped. Americans are holding on to new cars for an average of 5 years and 3.9 months, which is 4.5 months longer than a year earlier, according to estimates from a research firm R.L. Polk & Co. According to research, the average length of new-car ownership has risen 14 percent since the end of 2008 and there are no signs for a slowdown in this length. This is true because the economic damage is so profound and the credit is so clogged that U.S. economy is in for a structural change: higher unemployment level, scaled back consumer spending and a devalued dollar, giving rise to stagflation. With this backdrop, the trend that helps auto parts industry will continue. There are many other factors that help auto parts retailers: • Relatively stable price of gas, according to AAA, the price of regular unleaded gasoline has gone up only 11 cents from $2.69 to $2.80 in one year • Due to increased competition, increased production efficiency, increased regulator scrutiny and many other reasons quality of vehicles have improved. This makes most car drivable until 200,000 with regular repairs and maintenance • During normal times, people visit auto dealerships to get their cars fixed but due to recent headwinds many dealerships shut down leading consumers to go to independent auto retailers. This trends is a strong growth catalyst for O’Reilly that effectively serves both hands-on drivers as well as professional mechanics • Credit bust took a toll on many consumers’ credit scores making it difficult for them to borrow money to buy new cars. This is one of the largest reasons that keep people driving their existing cars. This will continue for years to come until all the shoes drop. Now that the industry growth in the coming 2 to 3 years can be properly justified, let’s take a look at why O’Reilly will be a direct and biggest beneficiary for this trend: O’Reilly has opened an average of 150 stores per year the past three years and will open 170 new stores this year. O'Reilly has about a 4% share of the $94 billion automotive parts aftermarket industry. The number of 7-plus-year-old cars is set to grow 3% annually over the next three years, well ahead of the growth in younger cars. Excluding the profits from CSK acquisition, O'Reilly's same-store sales growth has exceeded both its peers and retailers as a whole for 15 of the past 18 years. O'Reilly's huge distribution infrastructure creates a competitive advantage over all of its peers and becomes a serious threat for new entrants. O’Reilly is on track to become Walmart of auto-repair industry. O'Reilly had 8.5 million distribution center square feet, more than AutoZone and Advance combined. On a per-store basis, it had 2,400 square footage of distribution center space per store compared to 1,100 for Advance and 864 for AutoZone. This helps O’Reilly become a serious commercial player with major b2b business. O'Reilly's distribution center carry 125,000 to 175,000 SKUs — double that of its stores. When automakers roll out new models, O'Reilly stocks parts unique to that vehicle that makes them a supplier of choice for parts. O’Reilly has stellar growth in front of it and classic execution with steady and continuous ongoing share repurchases for past 10 years. O'Reilly generates extra cash flow from getting longer vendor terms on inventory and using more financial leverage. It uses that money to buy back shares, which grows earnings per share. Vendors currently finance 55% of O'Reilly's inventory, and the company wants to raise that to 60%-70% by the end of 2012. Additionally Barchart technical momentum indicators also favor the stock to perform positively: Barchart 48% technical buy signal that is strengthening Trend Spotter buy signal Above its 20, 50 and 100 day moving averages 14 new highs and up 7.10% in the last quarter Relative Strength Index 61.44% and rising Barchart computes a technical support level at 61.50 Recently traded at 63.98 which is above its 50 day moving average of 62.18 Fundamental factors: Sales are projected to increase by 7.10% this year and another 7.00% next year Earnings are forecasted to increase annually by 15.88% for the next 5 years http://www.barchart.com/quotes/stocks/ORLY