In an environment of slowly but steadily rising wages, consumers have more disposable income to pursue DIY or "do-it-yourself" projects at home. O'Reilly Automotive (NASDAQ: ORLY), a constituent of the Consumer Discretionary Select Sector Fund, appears to be well-positioned to take advantage of this trend. We provide an overview of this automotive parts retailer and its unique business model.
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This podcast was recorded on Nov. 29, 2016.
Vincent Shen: For our second company, I wanted to pull this time from the XLY fund. This is one we've never covered, as far as I can recall, on this Consumer Goods series for Industry Focus. That's with O'Reilly Automotive. Typically, on Fool.com, they might be covered under the industrial sector, but obviously still very much a retail-facing side to their business. Basically, they're selling auto parts and other more common consumer supplies, like your motor oil, your anti-freeze. Their business is split about 50% to what they call their do-it-yourself segment, and 40% to their professional segment. They seem to have some really nice tailwinds in the idea that, cars are staying on the road longer than ever, technology has allowed them to be much more reliable, and the average age, I have here from a USA Today report, of cars on the roads in the U.S. is about 11.5 years, which is, I believe, the highest in history. What do you think about O'Reilly Automotive?
Asit Sharma: I like it. I want to read out a few stats. It has 4,700 auto parts stores in 45 states. It's very well spread around the U.S. And there's a good chance our listeners have at least driven past one, if you're not a customer. I like that they're growing their sales at a pretty good clip. This past third quarter, revenue increased 7% on a year-over-year basis. Same-store comparable sales increased 4%. It has pretty decent margin for an automotive retail chain. It has about a 23% net profit margin through the first three quarters of this year.
This is one of those instances where studying the ETF and learning about the industry helps you understand the company better. If I had just asked you before this podcast which of the two companies we just talked about is the staple and which is the discretionary, you might have said the staple is O'Reilly Automotive and the discretionary stock is Monster Beverage Corporation. Monster Beverage Corporation is the staple, because remember the S&P 500 geniuses who put together the index say that we need that energy drink, and O'Reilly Automotive is the discretionary because when your income rises, you have more in your pocket to maybe do that project yourself, you probably have some leisure time and the inclination to go and buy that part and tinker with your vehicle. As incomes decline, this potentially hurts O'Reilly Automotive. But they've been a beneficiary of the growth that we've had post-recession. I like it very much. I think that it's a small enough footprint there's quite a bit more for it to expand into. The company has added about 140 stores this year. It definitely can keep growing that base. It's in a good sector. Gas prices are low. The average age of cars is, as you pointed out, getting longer. This company, like Monster, is in a good position for years of sustainable revenue growth. I think it's another buy.
Shen: I was just thinking about something I saw, the company has mentioned that there's been a growing trend in terms of their DIY category, people being more willing to do that work on their car, which has benefited them. Also, they had that dual exposure on the professional side. Sometimes, with the explosion of things like YouTube and online guides and the information you can get online now, it does make things like repairing something smaller on your car much more approachable and accessible. Just a thought that I had. In this case, that technology side will benefit companies and sectors that you don't really expect.
Asit Sharma has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Monster Beverage. The Motley Fool owns shares of O'Reilly Automotive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.