Focus Fund Company Spotlight: O'Reilly Automotive

While O’Reilly Automotive is a leader in the automotive aftermarket parts industry in the U.S., the company’s recent acquisition of Mexico-based Mayasa Auto Parts illustrates the company’s greater goals to expand its operations internationally.

August 2020
  • David Rainey
    David Rainey, CFA
    Co-Portfolio Manager
  • Brian Macauley
    Brian Macauley, CFA
    Co-Portfolio Manager
  • Ira Rothberg
    Ira Rothberg, CFA
    Co-Portfolio Manager

An Industry Leader in Automotive Parts

From a single store in 1957, O’Reilly Automotive Inc. has grown to become an industry leader within the specialty retail space for automotive parts, tools, supplies, equipment, and accessories. The company currently operates nearly 5,600 stores across 47 U.S. states, and has built a reputation for strong customer service and product availability. Its 29 distribution centers provide its stores with same-day or overnight access to an average of 159,000 unique store keeping units (SKUs), and often include hard-to-find products not stocked by other auto part retailers. Additionally, the company maintains a robust online presence, allowing customers to view inventory availability and place orders to be picked up in store or delivered.

Over four decades ago, the company pioneered a “dual-market” business model whereby it sells to both repair shops and do-it yourself customers. This model enables higher service levels, higher sales per trade area, and higher inventory turns.

O’Reilly sells premium name brand products as well as proprietary private label products that consist of house brands and nationally recognized proprietary brands.

 Mechanics and do-it-yourselfers increasingly trust O’Reilly’s private label parts to deliver the same form, fit, and function as premium name brand parts. Private label sales offer a higher margin than name brand products and have expanded from approximately 30% of sales a decade ago to greater than 45% today.

We think O’Reilly has a long growth runway, and is positioned to benefit from industry consolidation trends, international expansion, and the growth of its private label sales. The company’s scale, unique distribution infrastructure, and customer service oriented culture should allow it to take market share in a still fragmented U.S. market for years to come.

Catalyst for Growth: International Expansion

In November 2019, O’Reilly purchased Mayasa Auto Parts, a specialty retailer of automotive aftermarket parts based in Guadalajara, Mexico. While the company operates 21 brick-and-mortar locations throughout Mexico under its own brand name, its strength lies in its six distribution centers, which serve over 2,000 independent retailers across 28 Mexican states.

We believe O’Reilly can capitalize on the fragmented nature of the Mexican aftermarket auto parts market, potentially opening as many as 600 stores across Mexico as it captures market share from smaller, localized retailers. Despite the smaller size of the Mexican market, with approximately 50 million vehicles compared to the United States’ 285 million vehicles, the similarities in makes and models of automobiles across the two markets allow O’Reilly to leverage its strong purchasing power.

Importantly, O’Reilly’s acquisition of Mayasa is the company’s first expansion outside of the U.S. We believe Mexico makes sense to be O’Reilly’s first international market, not only for its geographic proximity and similarity in car models to the U.S., but also because O’Reilly has a capable and Spanishspeaking regional management team that can help to instill its corporate culture.

In addition to gaining access to the Mexican market, O’Reilly plans to seize growth opportunities by expanding its global footprint. Management has indicated a desire for further international expansion, with Canada and the Caribbean on its short list. In recent years, O’Reilly’s U.S. based competitors have built or acquired a presence in Brazil, continental Europe, the United Kingdom, Australia, and Southeast Asia, and we expect O’Reilly to expand outside of North America over time.

Our Independent Research and Key Insights

O’Reilly continues to meet our key criteria:

Competitive Position

- Unique distribution model enables higher service levels, sales per trade area, and inventory turns.

- Customer-centered culture provides a valuable service and execution advantage.

- As the 3rd largest company within the industry, it has substantial buying power.

- These advantages have enabled the company to generate a greater than 30% return on capital for many years.

Growth Opportunity

- Although an industry leader, O’Reilly only has a 10% share of a $100 billion addressable market.

- We expect many years of organic store growth in the U.S as the store count increases from about 5,600 to 7,000.

- The company’s expansion into Mexico offers access to a highly fragmented market, and leverages the company’s strong operations and buying power.

- We expect the company to expand into additional countries over time.

Management Quality

- We view Chairman David O’Reilly as an exceptional capital allocator who has successfully shepherded the company through five major acquisitions.

- 75% of senior leaders have been with O’Reilly for 10 years or more. The CEO and Chief Operating Officer have been promoted from within and are skilled operators with a combined 74 years of experience.

Valuation

- As of August 24, the company traded at 20.5x our 2020 earnings per share (EPS) estimate.

- From the beginning of 2011 through July 2020, the company has repurchased 77.9 million shares of its common stock at an average price of $165.10. There were about 74 million shares outstanding as of August 2020.

- The company has modest financial leverage and one of the strongest balance sheets in the industry.

- O’Reilly has experienced an annualized EPS growth rate of 23% over the past 10 years (2010-2019).