There is a classification of business models and corporate stocks that is known as anticyclical or countercyclical. What happens, or can happen, is that if there is economic difficulty persons might not buy expensive or new products but try to maintain what he or she already owns. If you look back at charts from the time of the 2008 financial crisis–and after–you can observe just how well AutoZone (AZO), for example, performed as its sales kept going up while the rest of the stock market struggled. 

Upon observing since, it has repeatedly been the case that a warm winter works against auto parts retailers. Their results are better when winters are cold, perhaps partially due to failure of belts or hoses; and maybe also attributable to the mindset of a customer who has access to a heated garage. There is a spell of fiercely cold weather taking hold currently.

AutoZone is consistently weighted toward what is known as “DIY” customers, or persons who buy products in store. Another term in the auto parts industry is “DIFM,” or Do It For Me, referring to service facilities that place orders. Data is not available, but it could make sense from the above that AutoZone sells a lot of motor oil, coolant, replacement wiper blades, and ice scrapers. While AutoZone also carries radiators and timing belts, O’Reilly Automotive (ORLY) usually has a better DIFM business. There is competition to have hard to find parts readily available, and considerable effort goes into distribution networks and inventory systems. 

Advance Auto Parts (AAP) is also typically compared to O’Reilly and AutoZone. While AAP does not have the central and South American presence of AutoZone, it may still report results that are competitive or better than AutoZone’s. O’Reilly consistently has top data and its share price tends to trade at higher multiples than its competitors.

In years past, AutoZone had a highly-rated car battery (which can be observed to be located in the back of the store), among products under its Duralast brand. Virtually all of us can change a car battery, all you have to do is… Anyhow, vehicles are moving towards lithium-ion electrification, which probably doesn’t help the retail car battery traffic, even if it does not hurt it. Also, if you check up on ratings shown in Consumer Reports, the Duralast product is no longer considered as high quality. While AutoZone does have a meaningful presence in Mexico, and continues to establish stores in Sau Paolo, Brazil, current perception here is that the execution at O’Reilly is better.

The effects of Covid-19 are tragic. It may be surprising that the recession has ended in the United States. There has been growth in gross domestic product during each of the past two quarters. 

However, their stock prices have languished. In fact, they have recently been declining. There are at least two potential explanations. One is that the Democratic Party intends to increase the minimum wage and perhaps also health insurance benefit cost. Another is that tariffs exert pressure on the companies’ gross margin. The tariff issue is ongoing and not new.

As the firms continue to open stores, which are profitable, their reported revenues and earnings also go up. Further, those new locations, and existing storefronts, habitually have positive same store sales, or comps. Each year, individual stores report higher and higher customer receipts. Thus there is bound to be growth, even if some costs are an issue. 

What sometimes happens is, if same store sales are high enough, the corporation continues to report added profit on its employee cost. Typically it is described as “Leverage.” Comparable sales for O’Reilly in the past quarter are reportedly a staggering 16.9%, compared to a remarkably healthy 5% in the year prior! AAP and AutoZone each reported same store sales of 10.2% and 12.9%, respectively.

While the obvious acceleration of results at parts stores might moderate, they can continue to build on their gains.

The all time high share price for ORLY is $496.61, set on January 12th. It has been dropping since, but the stock finally closed up today, at $432.33. Its shares have traded at a price/earnings of between 16x and 32x over the past decade. If the stock market is willing to pay a 20x multiple on the firm’s consensus eps estimate, shares should be worth $464.

Also, a lot of public companies are not profitable yet handsomely compensate higher-ranking employees with stock and options that can be freshly issued. There are all sorts of bloggers who regularly post or publish articles claiming that such corporations should be bet against or shorted. Sometimes the companies can simply continue to issue stock at higher prices as to more easily fund activities and enrich their personnel. 

O’Reilly Automotive’s share count, including weighted average shares outstanding assuming dilution, consistently decreases. So while employees might own bigger shares of the company over time, an investor’s stake is not diminished, but also gains. ORLY does not pay a dividend to investors though.

Amid cold weather and lingering macroeconomic problems, there is reason to suspect that auto parts retailers can continue to enjoy better results. Their share prices have declined during recent clamoring to raise the minimum wage. Even if ORLY stock does not rise back up to set a new high in the near future, it may be a worthwhile opportunity for long-term investment.

*** the author owns ORLY stock

According to a report issued today by the Congressional Budget Office, “real (inflation-adjusted) gross domestic product (GDP) is projected to return to its prepandemic level in mid-2021 and to surpass its potential (that is, its maximum sustainable) level in early 2025. In CBO’s projections, the unemployment rate gradually declines through 2026, and the number of people employed returns to its prepandemic level in 2024.”

2/4/22 cold weather is forecast to expand

2/5/21 nonfarm payroll data is issued today, a write-up is here.

cold weather is persisting. Another story.

As of 3/26/21 it has set a new 52 week high. If it can earn $24 per share and trade at 25 x earnings per share, then $600 is a price target. That would be just under 20% higher than $506.74, which ORLY is closed at.

4/29/29 with recent results earnings of about $25 per share can support a price target of $625.