About Us   |   Commentary   |   Contact Us   |   Client Portal    330-454-6555

Back to All Articles »

Ask the Investor: Will Amazon disrupt the auto part suppliers like O’Reilly Automotive (ORLY)?

By: Ryan T. Fulmer
Sunday, August 6, 2017

In our July, Ask the Investor, we were asked whether Amazon was an attractive investment as they have been disruptive to many industries. Indeed the specialty auto parts companies like O’Reilly Automotive (ORLY), Autozone (AZO), and Advanced Auto Parts (AAP) have significantly underperformed the broad stock market by about 40% over the last twelve months.


Why have they underperformed the S&P 500 so drastically?


You guessed it; Amazon entered the auto part aftermarket business.  Considering that many analysts believe books may be Amazon’s only profitable product category, I think it will be challenging for them to disrupt the after-market auto supply business.


As a little bit of background, auto part supply stores have undergone rapid consolidation after the financial crisis.  In 2006, about 36% of the stores belonged to the top 10 auto part companies, which has risen to 51%.  Looking even further into the data about three companies control the top 10 with about 5,000 stores each and then Genuine Parts / NAPA with 1,100 as the fourth highest store count and number 10 with only 101 stores.


As you can see from the industry data, the top three players control most of the market.  Industry consolidation is a dynamic we look for at Beese Fulmer Private Wealth Management as it predicts less pricing pressure from competitors and higher levels of future profitability.


The automotive after-market is considerable at about $257 billion in total sales, which consists of several different segments: tire sales (11%), Do-It-Yourself sales (DIY; 20%), Do-It-For-Me sales or your typical mechanic (DIFM; 38%), and mechanics labor (31%).


Of the $257 billion market, O’Reilly Automotive would have an addressable market of about $148 billion.  What sets O’Reilly apart from its competitors is that their revenue is split between DIY and DIFM. Many local mechanics source parts from O’Reilly due to their low price guarantee, large inventory of parts, and ability to get out-of-stock parts within 24 hours.


Having a large in-store inventory selection and quick delivery of out-of-stock or special order parts within 24 hours is a unique advantage that peers try to emulate, but have been unsuccessful duplicating.


Competitors have failed to replicate their unique inventory logistics because of O’Reilly’s hub-and-spoke model.  Regionally, O’Reilly has 27 distribution centers which would support just under 300 stores and have well over 140,000 different stock keeping units (SKUs).  The distribution centers are connected to “Hubs” which have an average of 44,000 SKUs, and the “Hubs” are connected to individual stores or “spokes” which receive daily deliveries.  As you can tell, it is an intricate logistical network that provides O’Reilly a competitive advantage.


With a more clear understanding of O’Reilly’s unique competitive advantage hopefully, it begs the question of whether or not the Amazon sell-off is overdone.


Management has their own opinion and with their latest earnings release announced they repurchased about three times the amount of stock during the quarter that Wall Street analysts had modeled at almost $852 million. Keep in mind that the total market capitalization around the time of the earnings announcement was $17 billion.


With O’Reilly trading at about 15 times 2018’s earnings estimates the stock looks relatively attractive compared to the broad stock market at close to 19 times earnings.  With that being said, the stock market is a great equalizer and investors need to carefully weigh the possibility that the Amazon threat is only beginning.


Back to All Articles »

The Beese Fulmer FREE Wealth Profile

Our WEALTH PROFILE helps us gather the type of information we've found essential in establishing who you are…where you want to go…and how you want to get there.
  • We start with basic background information about your assets and objectives.
  • Then we define your goals for the portfolio and what we call your Investment Psychology (conservative, moderate, or aggressive? patient or reactive? hold-and-grow or make withdrawals?).
  • We determine your attitudes and behaviors concerning the market, a meaningful guide to your favored portfolio philosophy.
  • The final section characterizes your personality in general terms and relating to finances.
Before proceeding, think about your total wealth; not just your investments, but your real estate, bank accounts, business assets, and insurance. These are all part of your total wealth picture.

While we specialize in the investment piece, we will take other assets into account in order to build a portfolio that best complements these assets.

Click below to schedule
your FREE personalized Wealth Profile. 


The Beese Fulmer Wealth Profile

Call today to schedule your FREE personalized Wealth Profile


© 2018 Beese Fulmer Private Wealth Management  |  Privacy Policy  |  About Us  |  Commentary  |   Contact Us  |  Terms  |  330-454-6555