On Wednesday, O’Reilly Automotive (ORLY), one of the nation’s largest after-market auto parts retailers, announced that it was revising same-store sales guidance downward for its second quarter. The firm had previously guided to growth of 3-5%, but now it expects same-store sales growth in the range of 2-2.5%. The company previously cited an unseasonably warm winter for shifting sales into the first quarter from the second. However, sales growth remained weak, and we think it is the result of strength in new cars sales. O’Reilly is now fairly valued following its drop.
Much like CarMax (KMX), we think O’Reilly’s weakness signifies the strength of new car sales in the United States. With new car sales returning to normalized rates, auto parts stores will not see the same consistent strong same-store sales growth because fewer consumers will be fixing up old cars.
Again, we think this bodes extremely well for automakers with large US exposure like Ford (F), General Motors (GM), Toyota (TM), Volkswagen (VLKAY) and Honda (HMC). Though Europe remains weak and flirts with recession, US auto sales will continue to be resilient, in our view. On the other hand, O’Reilly, Advance Auto Parts (AAP) and AutoZone (AZO) could struggle to maintain current growth trajectories, which could pressure the sector in the near-term.
O’Reilly scores a 4 on our Valuentum Buying Index, so we wouldn’t touch the shares at current levels. We think exposure to automotive OEMs gives investors the best chance for capital appreciation at this time. Our favorite name is Ford, which we hold in our Best Ideas Newsletter portfolio, but General Motors also looks very cheap at current levels.