2. Executive
Summary
Fundamental analysis
Auto part Industry is a mature Industry. As the aging of mobile and vehicle miles increase, auto part
Industry will growth at low-digit rate.
Auto part Industry is going to turn to oligopoly industry. The economy scale will be the moat in this
industry.
O‘Reilly’s gross margin will increase due to the market centralization.
Concern :
• Competition will more intense because a limited firms share a mature market.
• Autonomous car maybe a risk to O‘Reilly’s if customers “rent” the car rather than “buy” it.
Valuation
According to forward PE methodology (23X, target price $314.6)、DCF Model ( implied investor
required return 8%) and “own the company” aspect (implied PE 26X), the stock price has addressed
all of the fundamental factors.
Recommendation : Hold (Not buy)
2
4. Merge Hi/Lo
182 stores
ORLY
Event Chart
Founded in 1957
By Charles F. O'Reilly
Gross margin (RHS)
Stores (LHS)
Unit : %
Merge Midstate
82 stores
Merge Midwest
72 stores
Merge CSK
1342 stores
Merge VIP auto
56 stores
40%
42%
44%
46%
48%
50%
52%
54%
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Source: annual report, company
5. Brief
Introduction
5
Source: annual report, company
65% 62% 59% 59% 58% 58% 58%
35% 38% 41% 41% 42% 42% 42%
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013 2014 2015
Product mix
DIY DIFM
0%
2%
4%
6%
8%
10%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Same Store Sales growth
13 year CAGR : 5.7%
O‘Reilly is the third largest auto part company
O‘Reilly adopts DIY ( Do it yourself) and DIFM (Do it for
me) dual strategy. DIY occupies 42% of total revenue;
and DIFM is 58%.
The key of success in auto part industry is economies of
scale and professional service. O‘Reilly opened a lot of
store by M&A and O‘Reilly self, and O‘Reilly has more
competitive advantage in the auto part service. The result
of this two factor is reflected in the 5% up of same store
sales growth in the long run.
6. Brief
Introduction
Business Model
6
Source: annual report, company
Economies
of scale
Expand rapidly
(200+per year)
Establish
DC、Hub store
DIY/DIFM
strategy
Satisfy clients
demand
Professional
training
Excellent
Operating management
Maintain
relationship with
vendors
Vendor Finance
Program
Lower cost
Fulfill client’s
demand
immediately
Massive purchase
Replenish everyday
Provide “hard-to-find” parts
Enhance
Inventory management
Price
advantage
Focus on
High/low end
Intensify service quality
Enhance
Client’s loyalty
Assure the
source of parts
Enhance Cash
management
Purchase inventory
with a lot of vendors
Delay the payment period
Good operating
management
Enhance the ability of expanding
7. Brief
Introduction
The key of success in auto part industry is economies of scale and professional
service.
Economies of scale can reduce a lot of import cost, and gains the advantage in price competition.
Automotive repair need a lot of knowledge and experience. Professional service can increase the
customer’s loyalty.
O‘Reilly’s expanding is mainly driven by opening new stores and M&A. It has
merged 5 companies in recent 20 years. The total amount of stores is increasing
from near 200 stores to 4571 stores in 2015.
The direct advantage of expanding is the increasing of bargaining power to the vendors. The gross
margin increases as amount of stores increasing.
As expanding, logistic management is more and more important.
O‘Reilly built 27 Distribution Centers(DC) and 305 hub stores which provide parts for near 5,000
stores.
97% of stores replenish at least once from DCs or hubs everyday, and 90% in the weekend.
Except replenishing everyday, O‘Reilly is trying to fulfill client’s demand immediately. It provides
“hard-to-find” parts through DCs and hubs.
7
Business Model
Economies
of scale
Expand rapidly
(200+per year)
Establish
DC、Hub store
Lower cost
Fulfill client’s
demand
immediately
Massive purchase Price
advantage
Enhance
Client’s loyalty
42%
44%
46%
48%
50%
52%
54%
0 2000 4000 6000
Gross margin(Y) is positive correlated
with stores(X)
ORLY
AZO
97%
90%
平日 週末
O‘Reilly build DC & Hub
Replenishment everyday
Enhance
Inventory management
Weekdays Weekend
Source: annual report, company
Replenish everyday
Provide “hard-to-find” parts
8. Brief
Introduction
The key demand of clients
Fulfill products immediately and professional service
O‘Reilly adopts and DIFM dual strategy. It focus on the general customer who
preferred DIY and the customers who have high profession service demand.
In the DIY market, O‘Reilly’s advantage is providing parts immediately (especially on “hard-to-
find” parts). O‘Reilly stores replenish at least once from DCs or hubs everyday so almost all of
the parts the clients need can be delivered in one day. O‘Reilly also has online shop to
provide the convenient shopping experience. The O’Rewards Loyalty Program can collect the
client’s demand and provide the special discount for members.
In DIFM market, O‘Reilly provide the professional service. O‘Reilly has more than 1,000 train
classes in 2015. these classes train over 30,000 techs. The 44 team members of technical
support department have more than 635 years automotive experience. O‘Reilly provide
professional service for different client, and has higher gross margin in DIFM.
The revenue proportion of DIFM is slightly increasing in recent years because the structure of
automotive is more and more complex.
8
Business Model
Establish
DC、Hub store
Fulfill client’s
demand immediately
DIY/DIFM
strategy
Satisfy clients
demand
Professional
training
Focus on
High/low end
Intensify service quality
Enhance
Client’s loyalty
Technical support department
44 members ;635year experience
1,340 train classes
train over30,000 techs
140
145
150
155
160
165
170
175
180
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2009 2010 2011 2012 2013 2014 2015
Although stores per DC increased
Every store has more capacity per DC
DC & Hub stock unit per store(RHS)
stores per DC (LHS)
Source: annual report, company
Unit : store Unit : SKU
9. Brief
Introduction
In order to ensure that clients can get the parts, O‘Reilly maintains
relationship with a lot of vendors and creates the supply chain system.
O‘Reilly launched Vendor Finance Program in 2011. it intensifies the
company’s Operating management
Vendor Finance Program: When vendors sale the product to the O‘Reilly, they sale the account
receivable to the bank. O‘Reilly will pay the account receivable after one year.
As this program executed, the account receivable O‘Reilly paid in this year is equal to the
import cost in previous year. This program largely reduce O‘Reilly’s operating cycle from 156
days in 2010 to -10 days in 3Q16.
Because of the success of vendor finance program, O‘Reilly has more cash and
ability to expand and repurchase (O‘Reilly started stock repurchase in 2011).
9
Business Model
2010 operating cycle
156 days
2016 3Q operating cycle
-10 days
Source: annual report, company
Excellent
Operating management
Maintain
relationship with
vendors
Vendor Finance
Program
Assure the
source of parts
Enhance Cash
management
Purchase inventory
with a lot of vendors
Delay the payment period
Good operating
management
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015
AP paid /last year import
AP/inventory
O‘Reilly’s Finance Program
Delay the payment period
10. 6
7
8
9
10
11
12
Passenger Cars Light Trucks
2,500
2,600
2,700
2,800
2,900
3,000
3,100
3,200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Total Vehicle Miles Traveled
Industry
Outlook
Total vehicle miles traveled increase in recent year, and rise 13%
since 2000.
Vehicles registered grow 15% since 2000.
Average life of Light truck is increasing from 8.4 years in 2000 to
11.4 years in 2014.
In conclusion, customer’s repair demand is higher and higher.
10
Slow but stable growth
Demand side
Passenger Cars
Light Trucks
Unit : Trillion
Source: FRED
Source: IHS
Unit : years
200,000
210,000
220,000
230,000
240,000
250,000
260,000
270,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Number of vehicles registeredUnit : thousand
Source: Statista
11. 0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
30,000
31,000
32,000
33,000
34,000
35,000
36,000
37,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Industry
Outlook
The total stores in auto parts industry didn’t have significant increasing
in recent year and the market share of top 4 company is rising. It
means auto parts industry is turned from perfect competition to
oligopoly, however the industry HHI is only 619.
I calculate the penetration rate by the amount of trucks. We can find a
lot of state has low penetration rate. The most competitive state is TX、
FL、CA, however these states’ penetration rate is also lower than 50%.
It’s the potential opportunity to O’Reilly.
11
Market centralization
Supply side
Source: Company
Source: Federal Highway Administration, Company
Top 4 market shares (RHS)Stores (LHS)
Unit : thousand
Interactive Chart
https://jsfiddle.net/bear0103papa1/byjqdy99/4/embedded/#Result
Interactive Chart
Market Centralization
12. Peer
Comparison
According to SSSG data, we can find O‘Reilly’s revenue is more stable
than others even in the recession(2011-2012). It means Even if whole
market is in the recession (Total vehicle miles traveled decreased),
O‘Reilly still remain high clients’ loyalty and continue to gain market
share.
O‘Reilly has high gross margin in the same scale (see P7 and Gross
margin chart). It reveals O‘Reilly has higher inventory management
ability. O’Reilly’s operating margin is also rising over time.
12
Profitability
Source: Company
(4%)
(2%)
0%
2%
4%
6%
8%
10%
2008 2009 2010 2011 2012 2013 2014 2015
Same Store Sales Growth
Auto Zone
Advance
O’Reilly
40%
42%
44%
46%
48%
50%
52%
54%
2008 2009 2010 2011 2012 2013 2014 2015
Gross Margin
Auto Zone
Advance
O’Reilly
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015
Operating Profit Margin
Auto Zone
O’Reilly
Advance
Source: Company
13. AZO has highest market in auto parts market. on the other
hand, Advance’s market share is highest in 2013 because it
merged General Parts. Advance’s market share is falling in
recent year. In the end, O‘Reilly’s market share is growing
stably.
In state aspect, AZO has more placement in US, and it more
focuses on top tier states. O’Reilly has more stores in top tier
and third tier states. Advance focuses on Second tier, third tier
and other states.
而在佈局方面,彼此之間已經有許多城市開始面臨競爭
Peer
Comparison
amount of stores
States class
Penetration
criterion
AutoZone Advance O’Reilly
Top tier 4% 1,450 8,75 1,305
Second tier 3% 1,218 1,429 672
Third tier 2% 1,262 1,365 1,285
Other 0% 1,367 1,436 1,310
Total 5,297 5,105 4,572
13
O’Reilly’s market share is going up
Source: Company
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2008 2009 2010 2011 2012 2013 2014 2015
Market share
Auto Zone
Advance
O’Reilly
NPNA
Source: Company
Source: Company
Top 5 of stores
AutoZone Advance O’Reilly
Texas Florida Texas
California North Carolina California
Florida Georgia Missouri
Ohio Pennsylvania Georgia
Illinois Ohio Illinois
14. (200)
0
200
400
600
800
1,000
1,200
2008 2009 2010 2011 2012 2013 2014 2015
FCF
(50)
0
50
100
150
200
2008 2009 2010 2011 2012 2013 2014 2015
Operating cycle
Peer
Comparison
O’Reilly’s Operating cycle benefits from vendor finance
program. O’Reilly’s Operating cycle is falling over past five year.
O’Reilly’s CFO/sales is highest in recent years.
O’Reilly’s Free cash flow is increasing quickly since 2011 due to
vendor finance program. That’s the reason of stock repurchase.
14
Operating cycle and quality of earning
Source: Company
Auto Zone
O’Reilly
Auto Zone
Advance
O’Reilly
Auto Zone
O’Reilly
Advance
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015
CFO/sales
Unit : Million
Source: CompanySource: Company
Unit : Days
15. 0%
2%
4%
6%
8%
10%
12%
14%
0%
500%
1000%
1500%
2000%
2500%
3000%
3500%
4000%
2008 2009 2010 2011 2012 2013 2014 2015
Interest coverage rate: ORLY(LHS) AZO(RHS)
0%
10%
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015
Finance Debt ratio
Peer
Comparison
O’Reilly’s financial debt ratio (LR debt+SR debt/Total asset) is lower than AZO
O’Reilly’s interest coverage ratio is better than AZO, too.
O’Reilly has lots of debt capacity.
15
Solvency
Source: Company
Auto Zone
O’Reilly
Auto Zone
O’Reilly
Source: Company
16. I expect O’Reilly’s SSSG will be 7% and it will expand 215 stores
and 220 stores in next two years. On the other hand, DIFM’s
revenue growth will faster than DIY.
I expect the gross margin will increase with store expanding due
to economies of scale.
O’Reilly’s operating margin will decrease to near 32% (2007’s
level) because the expense which was recognized after merged
VIP-auto is Amortized.
In 2008,
O’Reilly merged CSK
30%
35%
40%
45%
50%
55%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Margin
0%
5%
10%
15%
20%
25%
2010 2011 2012 2013 2014 2015
Revenue growth
Financial analysis
& forecast
16
Revenue and profit growth
Source: estimated by annual report
Source: estimated by annual report
0
1,000
2,000
3,000
4,000
5,000
6,000
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Total stores(RHS) & SSSS(LHS)
SSSS
Stores
DIFM
Total
DIY
SG&A Margin
Gross Margin
17. 0%
10%
20%
30%
40%
50%
60%
70%
FY
2010
FY
2011
FY
2012
FY
2013
FY
2014
FY
2015
FY
2016 E
FY
2017 E
FY
2018 E
ROE
According to my research, 2017E EPS will be $13.7 (considering
the stock repurchase). 2017E EPS will be $13.2 in 3Q16 diluted
outstanding shares.
Repurchase was higher than net income since 2011 because
O’Reilly want to dispose of excess cash. I think payout ratio will
continue to decrease to 100%. 2017E payout yield will be 3.9%.
O’Reilly’s ROE is rising in recent years. It’s mainly driven by
increasing of profit margin and leverage.
Financial analysis
& forecast
17
EPS、Payout and ROE
2011 2012 2013 2014 2015 2016E 2017E 2018E
Payout
(Million)
(977) (1,445) (933) (866) (1,136) (1,178) (1,079) (1,267)
Payout per
share
7.13 11.72 8.40 8.17 11.19 12.26 11.22 13.18
Payout ratio 1.27 3.16 1.77 1.35 1.53 1.34 1.00 1.00
Cash per
share
2.64 2.01 2.08 2.36 1.15 6.88 5.89 5.89
Free cash
flow (Mn)
790.7 950.8 512.1 760.4 867.5 1,100.6 857.6 1,142.6
1.7 1.5
2.2
3.0
3.7
4.8
6.0
7.3
9.2
11.2
13.7
15.5
FY
2007
FY
2008
FY
2009
FY
2010
FY
2011
FY
2012
FY
2013
FY
2014
FY
2015
FY
2016 E
FY
2017 E
FY
2018 E
EPS
18. Valuation
Although O’Reilly is a good company, all of fundament information is reflected. We can derive the
target price ( $314.6, PE 23X) from one year forward PE Band. It reveals just 13% upside.
In “own the company” aspect, the market value is 28,338 million at 2017/1/15.
Minus cash 560 million we should pay 27,777 million to buy the company
we can derive free cash flow 1,100 million in 2016
The FCF yield is about 4%. Implied PE is 26X
The DCF model also reveals investors’ required return is 8.82% at current price
Assume permanent cash flow growth rate is 3%
Debtors’ required return is 4.11%
18
150
200
250
300
350
400
2014/12 2015/3 2015/7 2015/10 2016/1 2016/5 2016/8 2016/11
One year forward PE Band
Price 20X 22X 23X 24X 26X