2. Executive
Summary
Fundamental analysis
ï”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.
ï”Auto part Industry is going to turn to oligopoly industry. The economy scale will be the moat in this
industry.
ï”OâReillyâs gross margin will increase due to the market centralization.
ï”Concern :
âą Competition will more intense because a limited firms share a mature market.
âą Autonomous car maybe a risk to OâReillyâs if customers ârentâ the car rather than âbuyâ it.
Valuation
ï”According to forward PE methodology (23X, target price $314.6)ăDCF Model ( implied investor
required return 8%) and âown the companyâ 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%
ï” OâReilly is the third largest auto part company
ï” OâReilly adopts DIY ( Do it yourself) and DIFM (Do it for
me) dual strategy. DIY occupies 42% of total revenueïŒ
and DIFM is 58%.
ï” The key of success in auto part industry is economies of
scale and professional service. OâReilly opened a lot of
store by M&A and OâReilly self, and OâReilly 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
DCăHub store
DIY/DIFM
strategy
Satisfy clients
demand
Professional
training
Excellent
Operating management
Maintain
relationship with
vendors
Vendor Finance
Program
Lower cost
Fulfill clientâs
demand
immediately
Massive purchase
Replenish everyday
Provide âhard-to-findâ parts
Enhance
Inventory management
Price
advantage
Focus on
High/low end
Intensify service quality
Enhance
Clientâs 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
ï”The key of success in auto part industry is economies of scale and professional
service.
ïŹ Economies of scale can reduce a lot of import cost, and gains the advantage in price competition.
ïŹ Automotive repair need a lot of knowledge and experience. Professional service can increase the
customerâs loyalty.
ï”OâReillyâs 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.
ïŹ The direct advantage of expanding is the increasing of bargaining power to the vendors. The gross
margin increases as amount of stores increasing.
ï”As expanding, logistic management is more and more important.
ïŹ OâReilly built 27 Distribution Centers(DC) and 305 hub stores which provide parts for near 5,000
stores.
ïŹ 97% of stores replenish at least once from DCs or hubs everyday, and 90% in the weekend.
ïŹ Except replenishing everyday, OâReilly is trying to fulfill clientâs demand immediately. It provides
âhard-to-findâ parts through DCs and hubs.
7
Business Model
Economies
of scale
Expand rapidly
(200+per year)
Establish
DCăHub store
Lower cost
Fulfill clientâs
demand
immediately
Massive purchase Price
advantage
Enhance
Clientâs loyalty
42%
44%
46%
48%
50%
52%
54%
0 2000 4000 6000
Gross margin(Y) is positive correlated
with stores(X)
ïŹ ORLY
ïŹ AZO
97%
90%
ćčłæ„ é±æ«
OâReilly build DC & Hub
Replenishment everyday
Enhance
Inventory management
Weekdays Weekend
Source: annual report, company
Replenish everyday
Provide âhard-to-findâ parts
8. Brief
Introduction
ï”The key demand of clients
ïšFulfill products immediately and professional service
ï”OâReilly adopts and DIFM dual strategy. It focus on the general customer who
preferred DIY and the customers who have high profession service demand.
ïŹ In the DIY market, OâReillyâs advantage is providing parts immediately (especially on âhard-to-
findâ parts). OâReilly 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. OâReilly also has online shop to
provide the convenient shopping experience. The OâRewards Loyalty Program can collect the
clientâs demand and provide the special discount for members.
ïŹ In DIFM market, OâReilly provide the professional service. OâReilly 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. OâReilly provide
professional service for different client, and has higher gross margin in DIFM.
ïŹ 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
DCăHub store
Fulfill clientâs
demand immediately
DIY/DIFM
strategy
Satisfy clients
demand
Professional
training
Focus on
High/low end
Intensify service quality
Enhance
Clientâs 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
ï”In order to ensure that clients can get the parts, OâReilly maintains
relationship with a lot of vendors and creates the supply chain system.
ï”OâReilly launched Vendor Finance Program in 2011. it intensifies the
companyâs Operating management
ïŹ Vendor Finance Program: When vendors sale the product to the OâReilly, they sale the account
receivable to the bank. OâReilly will pay the account receivable after one year.
ïŹ As this program executed, the account receivable OâReilly paid in this year is equal to the
import cost in previous year. This program largely reduce OâReillyâs operating cycle from 156
days in 2010 to -10 days in 3Q16.
ï”Because of the success of vendor finance program, OâReilly has more cash and
ability to expand and repurchase (OâReilly 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
OâReillyâs 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
ï”Total vehicle miles traveled increase in recent year, and rise 13%
since 2000.
ï”Vehicles registered grow 15% since 2000.
ï”Average life of Light truck is increasing from 8.4 years in 2000 to
11.4 years in 2014.
ïšIn conclusion, customerâs 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
ï”The total stores in auto parts industry didnât 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.
ï”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 TXă
FLăCA, however these statesâ penetration rate is also lower than 50%.
Itâs the potential opportunity to OâReilly.
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
ï”According to SSSG data, we can find OâReillyâs 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),
OâReilly still remain high clientsâ loyalty and continue to gain market
share.
ï”OâReilly has high gross margin in the same scale (see P7 and Gross
margin chart). It reveals OâReilly has higher inventory management
ability. OâReillyâs 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
OâReilly
40%
42%
44%
46%
48%
50%
52%
54%
2008 2009 2010 2011 2012 2013 2014 2015
Gross Margin
Auto Zone
Advance
OâReilly
0%
5%
10%
15%
20%
25%
2008 2009 2010 2011 2012 2013 2014 2015
Operating Profit Margin
Auto Zone
OâReilly
Advance
Source: Company
13. ï”AZO has highest market in auto parts market. on the other
hand, Advanceâs market share is highest in 2013 because it
merged General Parts. Advanceâs market share is falling in
recent year. In the end, OâReillyâs market share is growing
stably.
ï”In state aspect, AZO has more placement in US, and it more
focuses on top tier states. OâReilly has more stores in top tier
and third tier states. Advance focuses on Second tier, third tier
and other states.
ï”èćšäœć±æčéąïŒćœŒæ€äčéć·Čç¶æèš±ć€ććžéć§éąèšç«¶ç
Peer
Comparison
amount of stores
States class
Penetration
criterion
AutoZone Advance OâReilly
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
OâReillyâs 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
OâReilly
NPNA
Source: Company
Source: Company
Top 5 of stores
AutoZone Advance OâReilly
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
ï”OâReillyâs Operating cycle benefits from vendor finance
program. OâReillyâs Operating cycle is falling over past five year.
ï”OâReillyâs CFO/sales is highest in recent years.
ï”OâReillyâs Free cash flow is increasing quickly since 2011 due to
vendor finance program. Thatâs the reason of stock repurchase.
14
Operating cycle and quality of earning
Source: Company
Auto Zone
OâReilly
Auto Zone
Advance
OâReilly
Auto Zone
OâReilly
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
ï”OâReillyâs financial debt ratio (LR debt+SR debt/Total asset) is lower than AZO
ï”OâReillyâs interest coverage ratio is better than AZO, too.
ïš OâReilly has lots of debt capacity.
15
Solvency
Source: Company
Auto Zone
OâReilly
Auto Zone
OâReilly
Source: Company
16. ï”I expect OâReillyâs SSSG will be 7% and it will expand 215 stores
and 220 stores in next two years. On the other hand, DIFMâs
revenue growth will faster than DIY.
ï”I expect the gross margin will increase with store expanding due
to economies of scale.
ï”OâReillyâs operating margin will decrease to near 32% (2007âs
level) because the expense which was recognized after merged
VIP-auto is Amortized.
In 2008,
OâReilly 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
ï”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.
ï”Repurchase was higher than net income since 2011 because
OâReilly want to dispose of excess cash. I think payout ratio will
continue to decrease to 100%. 2017E payout yield will be 3.9%.
ï”OâReillyâs ROE is rising in recent years. Itâs mainly driven by
increasing of profit margin and leverage.
Financial analysis
& forecast
17
EPSăPayout 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
ï”Although OâReilly 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.
ï”In âown the companyâ aspect, the market value is 28,338 million at 2017/1/15.
Minus cash 560 millionïš we should pay 27,777 million to buy the company
ïšwe can derive free cash flow 1,100 million in 2016
The FCF yield is about 4%. Implied PE is 26X
ï”The DCF model also reveals investorsâ required return is 8.82% at current price
ï”Assume permanent cash flow growth rate is 3%
ï”Debtorsâ 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