Citi Sees 'Defendable Lead' In O'Reilly, Upgrades To Buy

• Shares of O'Reilly Automotive Inc ORLY have appreciated 33.76 percent year to date, reaching a high of $275.95 on October 29.
• Citi’s Kate McShane has upgraded the rating on the company from Neutral to Buy, while raising the price target from $275 to $295.
• McShane expects the stock’s strong run to continue, with persisting macro drivers and the company having built a robust supply chain network to meet DIFM and DIY demand.

Analyst McShane believes that O’Reilly Automotive’s competitors will take some time to not only match the company’s DC square footage but also to “integrate the whole network and optimize capabilities.”

According to the Citi report, “The DIFM business has been an arms race to not only offer access to a large amount of SKUs in order to satisfy garage requests but also provide same-day or next-day delivery.”

McShane believes that the company has been able to achieve the lead in this market, mainly by doubling the competition’s distribution square footage. “Faster delivery leads to increased loyalty,” McShane stated.

In the retail space, McShane explained that it is important to have in-stocks, since DIYers do not come into the store only to browse, they come in because they need to buy something.

Although O’Reilly Automotive’s stock has seen some pullback over the past month, possibly driven by concerns regarding the near term impact of weather on comps, the stock has expanded meaningfully over the past three years and is now one of the most expensive names in Hardlines.

“We think this valuation is justified as we think ORLY will continue to consistently beat expectations and consolidate a fragmented market through solid execution in a favorable macro environment and a leading supply chain,” McShane added.