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On Oct 22, 2013, we reaffirmed the Neutral recommendation on O'Reilly Automotive Inc. (ORLY - Analyst Report) based on its strong fundamentals and improved earnings expectations, which offset the negatives.

Why the Reiteration?

O’Reilly earnings increased 37.4% to $1.58 per share in the second quarter of 2013 compared with $1.15 in the year-ago quarter. Earnings also exceeded the Zacks Consensus Estimate by 9 cents.

O’Reilly is scheduled to release its third-quarter financial results after the closing bell on Oct 23, 2013. The Zacks Consensus Estimate for the company’s third-quarter earnings per share stands at $1.65, up 25.33% over the prior-year quarter.

O’Reilly regularly opens new stores to boost sales. Moreover, the company continues to benefit from its dual market strategy and strong distribution network. The increased buyback authorization and improved 2013 earnings guidance are added positives.

However, on the negative side, a large part of O’Reilly’s cash is locked in inventories, while its debt position is deteriorating. Moreover, the company’s stores are concentrated in a few locations in the U.S., which makes it sensitive to the economic and weather conditions of those regions.

Further, O’Reilly’s strategy of lowering the time-to-market for its products to satisfy the professional installer market puts it at a disadvantage versus competitors such as AutoZone, Inc. (AZO - Analyst Report) and Advance Auto Parts Inc. (AAP - Analyst Report). Considering these positive and negative factors, we choose to maintain our Neutral recommendation on the stock.

Other Stocks to Consider

O’Reilly currently carries a Zacks Rank #3 (Hold). CarMax Inc. (KMX - Analyst Report), which has a Zacks Rank #2 (Buy), is worth considering in the auto parts industry.

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