ORLY analysis
- 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
- 3. Agenda Brief Introduction Industry outlook Peer comparison Financial analysis & forecast Valuation 3
- 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
- 19. Appendix 19 Financial highlight Period FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 E FY 2017 E FY 2018 E Profitability Rev growth 11.4% 7.2% 6.8% 7.6% 8.5% 10.4% 10.0% 10.4% 6.5% GM 48.6% 49.0% 50.1% 50.7% 51.4% 52.3% 52.4% 53.0% 53.5% OPM 13.2% 15.0% 15.8% 16.6% 17.6% 19.0% 20.0% 21.2% 21.6% NI Margin 7.8% 8.8% 9.5% 10.1% 10.8% 11.7% 12.3% 13.1% 13.3% EPS 3.0 3.7 4.8 6.0 7.3 9.2 11.2 13.7 15.5 ROE breakdown ROE 13.1% 17.8% 27.8% 34.1% 38.6% 47.5% 54.4% 56.8% 57.2% ROA 8.3% 9.2% 10.2% 11.0% 11.9% 13.9% 13.4% 15.0% 15.3% Return on Sales 7.8% 8.8% 9.5% 10.1% 10.8% 11.7% 12.3% 13.1% 13.3% Asset turnover 1.07 1.05 1.08 1.10 1.10 1.19 1.09 1.14 1.15 Leverage 1.57 1.93 2.73 3.09 3.24 3.40 4.07 3.79 3.74 Turnover Ratios Days Receivables 8.2 8.5 7.3 7.2 7.3 7.4 7.8 7.8 7.8 Days Inventory 266.0 245.6 269.3 264.3 265.9 252.4 242.2 242.2 242.2 Days Payables 117.8 158.2 228.3 228.8 251.6 250.3 293.3 282.3 287.3 Net Trade Cycle 156.5 95.9 48.3 42.7 21.6 9.6 (43.2) (32.2) (37.2) Fixed Asset Turnover 2.8 2.8 2.8 2.7 2.7 2.8 2.8 2.9 2.9 Liquidity Analysis Current Ratio 1.9 1.7 1.2 1.2 1.1 1.0 1.1 1.1 1.1 Interest Coverage 22.6 35.9 28.8 26.3 27.6 30.2 28.0 30.8 33.3 Debt to Equity 0.57 0.93 1.73 2.09 2.24 2.40 3.07 2.79 2.74 Financial debt ratio 15% 22% 26% 30% 28% 28% 30% 28% 27% FCF 338.3 790.7 950.8 512.1 760.4 867.5 1,100.6 857.6 1,142.6 Payout Ratio 0.0% -232.9% -284.7% -159.3% -129.3% -146.0% -126.5% -100.0% -100.0% Dividend per share 0 0 0 0 0 0 0 0 0 Repurchase per share 0 7 12 8 8 11 12 12 14 Payout Yield Cash per share 0.21 2.64 2.01 2.08 2.36 1.15 6.88 6.11 6.40
- 20. Appendix 20 Income statement Income statement($Mn) 2011 2012 2013 2014 2015 2016E 2017E 2018E Revenue 5,789 6,182 6,649 7,216 7,967 8,763 9,672 10,297 COGS 2,951 3,085 3,280 3,507 3,804 4,170 4,542 4,791 Gross profit 2,837 3,097 3,369 3,709 4,163 4,593 5,130 5,505 OPEX 1,971 2,120 2,266 2,439 2,649 2,836 3,083 3,283 Operating profit 867 977 1,103 1,270 1,514 1,756 2,047 2,223 Other expense 51 36 45 48 54 59 57 73 Income before tax 816 942 1,059 1,222 1,460 1,698 1,990 2,149 Tax 308 356 389 444 529 619 723 781 Net income 508 586 670 778 931 1,079 1,267 1,369 EPS 3.71 4.75 6.03 7.34 9.17 11.22 13.68 15.46 Ratio 2011 2012 2013 2014 2015 2016E 2017E 2018E Gross margin(%) 49.01% 50.10% 50.67% 51.40% 52.25% 52.41% 53.04% 53.47% Operating margin(%) 14.97% 15.81% 16.60% 17.60% 19.00% 20.04% 21.16% 21.59% Profit margin(%) 8.77% 9.47% 10.08% 10.78% 11.69% 12.31% 13.10% 13.29% ROE(%) 17.85% 27.78% 34.09% 38.55% 47.48% 54.37% 56.78% 57.21% ROA(%) 9.23% 10.19% 11.05% 11.91% 13.95% 13.37% 14.99% 15.30%