RBC Repairs Thesis On O'Reilly Automotive, Upgrades Stock

O'Reilly Automotive Inc ORLY's stock is down nearly 10 percent in 2017, but some Wall Street analysts are laying out the bullish case for owning the stock heading into 2018.

The Analyst

RBC Capital Markets' Scot Ciccarelli upgraded O'Reilly's stock from Sector Perform to Outperform with a price target boosted from $218 to $282.

The Thesis

O'Reilly's stock has fallen mostly due to a comp slowdown from 4 percent-plus to 1.5 percent, Ciccarelli said in a note. But the poor comp performance can be attributed to factors that are likely to improve next year, including mild winter and summer reduced car part stress, fewer vehicles entering a "peak repair stage" of the lifecycle, and less buying activity from Hispanic customers.

While weather will always be a "wild card", it's a simple fact that car parts simply wear out over time and this should create a pent up demand for car parts in 2018 and 2019, the analyst said. Also, Hispanic customer activity has "started to rebound" in recent months after a six- to nine-month period of subdued activity.

Meanwhile, Amazon.com, Inc. AMZN's ventures in the space should be seen as "more of an investor topic than fundamental headwind" for four reasons, including:

• Used car parts is mostly an "immediate-need" business;
• The company's private label offers a competitive price advantage;
• The complexity of the business; and
• A lower customer overlap with Prime households on the DIY side.

"Given O'Reilly's strong historical performance, an attractive relative valuation, easy comparisons and the potential easing of comp headwinds, we think the stock's setup for 2018 is positive," the analyst concluded.

Price Action

Shares of O'Reilly were trading higher Wednesday morning, but nearly unchanged at time of publication..

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