Parker: O'Reilly Auto Drives Profits

01/31/2003 12:00 am EST

Focus:

Sherri Parker

Co-Editor, UnDiscovered Stocks

As its name implies, UnDiscovered Stocks seeks stocks that currently fall under Wall Street's radar screens, but due to unexpected growth or other catalysts are expected to attract future investor attention. Editor Sharon Parker has an uncanny ability to spot trends; while most stocks suffered in the 2001-2002 period, her focus on defense stocks led to a 56% portfolio gain. Here's her latest buy.

"I've found just the stock to supercharge your portfolio for 2003. O'Reilly Automotive (ORLY NASDAQ) is at the top of every market it serves. The company's connection to the auto supply business dates back to 1914, when Charles O'Reilly was a traveling salesman for a Missouri auto supply business. He son followed in its footsteps. In 1957, they went out on their own with a family-owned auto supply store. Since then, the firm has grown by leaps and bounds.

"Today, the company has 971 stores and nine distribution centers in 16 states, primarily in the Midwest and South. The company is the fourth largest pure-play aftermarket auto parts supplier in the US. It dominates its market areas, capturing the number one or two position in each of the regions it serves. Unlike its competitors, O'Reilly serves both the do-it-yourselfer and the professional markets. In fact, commercial sales have been climbing as a percentage of revenues.

"O'Reilly has a tremendous track record of internal growth. It is expected to open another 130 stores in 2003, which is estimated to result in a 25% increase in sales. That should translate into 20% earnings per share increases in the next three to five years. The firm has also built a successful track record in acquiring and profitably integrating purchases, and the potential for future acquisitions remains strong, as the industry is in consolidation. Moreover, the firm has been profitable throughout the worst of this economic slowdown. According to the Aftermarket Industry Association, the average age of the 200 million cars registered in the US is now 8.7 years. That's good news for O'Reilly, as the prime repair age for cars is 6 to 7 years, when warranties run out.

"The shares have formed a solid base near $25, very close to the company's 52-week low. From a technical perspective, a move up in the shares from here looks much more likely than a downward move. Insiders own almost 15% of the shares. Two O'Reillys continue to run the company and they have their money where their mouths are. The stock is undiscovered. Just a handful of analysts cover the company. And the stock is trading at bargain levels. Buy up to $27 for a target of $34."

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