Relative to store base, O'Reilly Automotive Inc ORLY has a sizable lead in distribution capacity, and the company is poised to win market share due to its best distribution capabilities, according to a report from Deutsche Bank.
As of late 2015, O'Reilly had 26 distribution centers, which, including bulk facilities came in at just under 11 million square feet. A total of 4,366 stores are serviced by these 26 facilities for a total footprint of 32 million square feet. Said differently, O'Reilly has 2,459 distribution square feet for every store, and 0.34 distribution square feet per 1 foot of store square footage, the report said.
By comparison, the brokerage said Advance Auto Parts, Inc. AAP's distribution comes in at 0.25 square feet per 1 foot of store square footage (about two-thirds O'Reilly's capacity). AutoZone, Inc. AZO's distribution to store square footage is even lower, coming in at 0.12.
O'Reilly's average store stocks come in at 23,000 SKUs vs. 22,000 for core Advance Auto Parts stores and 21,000 for AutoZone, according to the most recent 10-K filings.
"These data points illustrate why ORLY has a better chance of being in stock for parts demanded by commercial customers, and as importantly being able to deliver those parts on a timely basis. Thus, ORLY takes share and leads the space," analyst Mike Baker wrote in a note to clients.
Can O'Reilly Keep Beating Guidance?
Baker noted that O'Reilly has a strong track record of beating guidance and subsequently raising its guidance, noting the trend is likely to continue in 2016.
For the year, Baker sees EPS of $10.90, an increase of 19 percent year over year (ahead of consensus of $10.66, which is up 16 percent). "Each of these is ahead of the $10.10–$10.50 guidance, or up 10–15 percent. Last year, ORLY's original guidance was for growth of 12–13 percent, but they doubled that with 25% EPS growth," Baker explained.
"On the comp line, we are modeling 6.0 percent, ahead of consensus of 4.7 percent and guidance of 3–5 percent. This is below last year's 7.5 percent increase, which would be tough to maintain, but we do think consensus is too low," Baker said.
For the first quarter, the analyst estimate 6.0 percent comps versus a consensus of 5.2 percent.
Baker also commented on the M&A scenario in the sector, saying O'Reilly could buy Advanced Auto Parts.
"Moreover, while M&A is not the key part of our Buy rating on AAP, using current prices, we think ORLY could purchase AAP at a 20 percent premium and generate 27 percent accretion to our current estimates with a 50 percent stock deal, 5 percent synergies and 10 percent divestitures," Baker highlighted.
At time of writing, shares of O'Reilly were down 0.44 percent at $275.22. They have gained about 7 percent this year, while the benchmark S&P 500 index has fallen 1.72 percent.
Baker has a Buy rating and $300 price target on the stock.
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