A compelling argument can be made that auto part retailing is a fantastic business. Pay attention to John Harris who is part of the fabulous investment team at Ruane, Cunniff. His comments concerning O’Reilly Automotive (ORLY) are posted on the Sequoia Fund website in the shareholder meeting section:
“I talked about AutoZone (AZO) last year, I think. AutoZone was the first auto parts retailer that we bought, and we ended up selling it. Our concern was that ... I think what we found was that the auto parts retail business is a wonderful business for a lot of reasons. The stores are pretty spartan. The consumer is not expecting a fantastic store environment like you might find in a Tiffany or a Whole Foods.
“Also, the consumer is largely unaware of the prices of the goods that he or she is buying. If I told you to go buy a box of cereal, you would have a pretty good idea of what to pay for it. If I told you to go buy an alternator for your car, you might not have a very good idea of what a good or bad deal is. So the retailer has unusual power over the consumer in that business. So for those two reasons and some others as well, it's an excellent business.
“We were initially attracted to AutoZone because it is the dominant retailer in that business, and has been for awhile, and it was selling at a very, very low valuation. There was a management team there — still is, really, a chairman there, Eddie Lampert basically runs the company — and he was allocating capital in a very efficient way by buying the shares back, and it looked attractive.
“I think our concern with AutoZone was just that the company was being managed for short term profit, potentially at the expense of its ability to generate profits over the next 5, 10, or 15 years. Since we like to hold for awhile, we don't like the idea of sacrificing the future for the present. So we bought it and then we sold it, and we did that in a very shrewd way so that we bought it I think at 85, sold it at 77, and then it went up to 90.
“You can credit me for those skilled acrobatics. But along the way, we came across O'Reilly. Same business, excellent business. I think that we really liked the management team in O'Reilly. There was a real culture there. We are fond of businesses where there is a strong culture. It's probably the most — not just O'Reilly's but generally — under-appreciated source of competitive advantage, a strong culture, and O'Reilly has one. It is also in a unique position in that it sells half to commercial customers — these would be like body shops — and half to retail customers.
“O'Reilly also sells to a certain kind of retail customer who tends to be less of a car novice and more of a car fanatic. He likes the particular kind of store environment you'll find in an O'Reilly, which is different from the environment that you might find at an AutoZone or at an Advance Auto Parts, which is the other big retailer. So O'Reilly has sort of carved out an interesting little niche for itself, and we've been very pleased with the way Greg Henslee, who is the new CEO there, but a long term manager of the company, has performed. I think Greg has really exceeded our expectations in his first year or so of running the company.
“We bought it at a reasonable price. I was just saying to Bob the other day, I wish we had bought more. It has appreciated somewhat and it now sells for a higher P/E than it did when we purchased it, but probably not an unreasonable one, given its growth prospects. I think O'Reilly ... maybe it has 1,300 or 1,400 stores, and one of its competitors, NAPA, operates I think 6,000 stores. So there's potentially a long runway for O'Reilly, and we like the guys in charge and they are young. So I would imagine that if nothing material changes, we'll probably own it for a long time.
A visit to the O’Reilly website reveals the credo that defines the company culture:
We are ENTHUSIASTIC, HARDWORKING PROFESSIONALS who are DEDICATED to TEAMWORK, SAFETY and EXCELLENT CUSTOMER SERVICE. We will practice EXPENSE CONTROL while setting an example of RESPECT, HONESTY, and a WIN-WIN ATTITUDE in everything we do.
Combine the attitude and focus of O’Reilly with the fact that Americans will drive over 3 trillion miles in 2006, and that the average vehicle is 10 years of age (Per the O’Reilly website), makes for a very opportunistic industry.
Currently, O’Reilly trades around 22 times earnings and carries very little debt (about 8% of total capitalization). Its return on equity is around 15%. Therefore, it is not a bargain stock, but appears to be conservatively financed and efficiently managed.
As always, perform some due diligence and see if your long term stock portfolio can make room for this one.
Also check out:
- Ruane Cunniff Undervalued Stocks
- Ruane Cunniff Top Growth Companies
- Ruane Cunniff High Yield stocks, and
- Stocks that Ruane Cunniff keeps buying
About the author:
Bryan Kelleher is A Certified Public Accountant with a passionate interest in locating superior investments. You may contact him at email@example.com.