(By Mani) O'Reilly Automotive, Inc. (NASDAQ: ORLY) shares represent an attractive risk-reward at the current level especially after agreement to purchase the auto parts related assets of VIP Parts, Tires & Service.
O'Reilly Automotive is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, serving both professional service providers and do-it-yourself customers. Founded in 1957 by the O'Reilly family, the company operates more than 3,800 stores in the US.
VIP is a large privately held automotive parts, tires and service chain in New England, and has provided outstanding service to New Englanders for over 30 years. Based in Lewiston, Maine, VIP currently operates 56 stores located throughout Maine, New Hampshire and Massachusetts as well as a distribution center located in Maine.
[Related -Motorcar Parts of America, Inc. (MPAA): This Underrated Play In Auto Parts Offers 50% Upside]
These locations are akin to a Pep Boys' stores with an on-site service bay and a retail outlet. ORLY is solely purchasing the retail operations.
After the completion of the asset purchase agreement, VIP will continue to own and operate the tire and service components of the business and O'Reilly will own and operate the automotive parts sales and distribution operations of the business.
"We believe that vast majority of VIP's retail sales are on the DIY side. Assuming $1 mm in sales per location and a 0.5x – 1.0x revenue multiple, the purchase price would be $25 mm to $50 mm. ORLY had telegraphed its intention to enter the NE through acquisition, so the deal is not surprising," UBS analyst Michael Lasser wrote in a note to clients.
[Related -100 Most Attractive Stocks Bought By Popular Investment Gurus]
VIP deal gives O'Reilly a foothold in the New England region, and this purchase is really a distribution play for O'Reilly. It gives it a footprint from which it can expand across the Northeast.
"VIP already has a DC that serves its stores and it can likely be plugged into ORLY's existing supply chain. We believe ORLY will open more stores in this region (using its traditional format, not the acquired format) and will establish more DCs to support that growth," Lasser said.
Meanwhile, O'Reilly is in a good spot to maintain its brisk pace of growth. The company will likely sustain its 190 new organic locations in 2013. Assuming VIP deal closes in the first quarter, it would add 150 basis points to its square footage growth.
"The expansion potential in the NE (& FL) means that ORLY can maintain its mid-single digit unit growth for an extended period. While the AP market is moving closer to saturation, we think ORLY is in a strong competitive position," the analyst wrote.
As industry conditions return to normal, O'Reilly should see a consistent combination of comp increases, gross margin gains, SG&A leverage, and share repurchases.
"Together, these attributes should produce at least 15% to 20% EPS growth," Lasser added.