O’Reilly Automotive Inc (ORLY), AutoZone, Inc. (AZO): Which Auto Parts Chain Is a Good Buy Now?

Shareholders of O’Reilly Automotive Inc (NASDAQ:ORLY) have had a great time in the last five years. Since 2009, O’Reilly’s stock price has risen an incredible 366%, handily beating the S&P 500’s gain of only 34.60%. Recently, the company reported impressive second-quarter results. Famous investors, such as Joel Greenblatt, reduced their positions in O’Reilly in the first quarter 2013. Let’s take a closer look to determine whether or not O’Reilly is a good buy now.

O’Reilly’s impressive second-quarter results

In the second quarter of 2013, O’Reilly Automotive Inc (NASDAQ:ORLY) managed to grow its revenue and net income. Revenue increased 10% from $1.56 billion in the second quarter last year to $1.71 billion this year. Net income came in at $177 million, 21% higher than net income of $146 million in the second quarter of 2012. The company’s EPS increased 37%, from $1.15 to $1.58, mainly due to share repurchase activities in the second quarter, as the share count fell from 124.87 million last year to 110.28 million this year. In terms of operating performance, comparable store sales growth was 6.5% in the second quarter, with the 170 basis points increase in its operating margin.

For the full year, O’Reilly Automotive Inc (NASDAQ:ORLY) expects to grow its comparable store sales 3%-5%, with total revenue of around $6.6 billion to $6.7 billion. Earnings per share are estimated to be around $5.79 – $5.89 and the free cash flow might come in at $450 million – $500 million in 2013. The company recently increased its share buyback program by $500 million, bringing the total cumulative authorization under the share repurchase program to around $3.5 billion. O’Reilly is trading at around $122.50 per share with a total market cap of around $13.50 billion. The market values O’Reilly at as much as 12 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).

How about AutoZone and Advance Auto?

Compared to its peers AutoZone, Inc. (NYSE:AZO) and Advance Auto Parts, Inc. (NYSE:AAP), O’Reilly Automotive Inc (NASDAQ:ORLY) is the most expensively valued. AutoZone is trading at $438.80 per share with a total market cap of around $15.60 billion. The market values AutoZone at a lower valuation at around 10.1 times its trailing EBITDA. Advance Auto has the cheapest valuation. At $81.40 per share, Advance Auto is worth around $6 billion on the market. The market values Advance Auto at only 7.45 times its trailing EBITDA.

All three companies enjoy market leading positions. AutoZone, Inc. (NYSE:AZO), with more than 5,000 stores, is the market leader. O’Reilly Automotive Inc (NASDAQ:ORLY) ranks second with more than 4,000 stores, while Advance Auto Parts, Inc. (NYSE:AAP) stands in the third place with more than 3,900 stores.

Indeed, with the leading position, AutoZone, Inc. (NYSE:AZO) is the most profitable with the highest return on capital in 2012, at 76.60%, while O’Reilly Automotive Inc (NASDAQ:ORLY) has the lowest return on capital at only 40.30%. However, AutoZone has the highest leverage level at around 1.9 times its net debt/EBITDA. Advance Auto Parts, Inc. (NYSE:AAP) is the least leveraged business with a net debt/EBITDA of only 0.18. Moreover, among the three, Advance Auto is the only company that pays dividends. Although the dividend yield is quite small, at only 0.30%, but the payout ratio is quite conservative, at only 5%. Advance Auto could easily increase its dividend payout ratio to 30%, bringing the dividend yield to 1.80%.