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On Apr 19, we maintained our Neutral recommendation on O’Reilly Automotive Inc. (ORLY - Analyst Report) based on its benefit from its dual market strategy and strong distribution network and better performance in 2012-fourth quarter. However, we remain concerned about the company’s concentrated store locations and huge inventory level.

Why Maintained?

On Feb 6, O’Reilly reported a 22.6% rise in adjusted earnings to $1.14 per share for the fourth quarter of 2012 from 93 cents in the prior-year quarter, surpassing the Zacks Consensus Estimate by $1.08. Revenues in the quarter grew 7.2% to $1.5 billion, meeting the Zacks Consensus Estimate.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for 2013 went up 5.0% to $5.70 per share. The Zacks Consensus Estimate for 2014 also climbed 4.8% to $6.50 per share.

O’Reilly benefits from its dual market strategy and strong distribution network. A mix of commercial sales offers the company with greater exposure to less discretionary sales of hard parts and allows it to operate in smaller markets.

O’Reilly will primarily benefit from the aggressive store expansion strategy and share repurchase policy. During the fourth quarter of 2012, O’Reilly opened 24 new stores and 185 store openings in 2012. It also intends to open a total of 190 new stores in 2013. With new stores, O’Reilly plans to penetrate further in the existing markets as well as expand in new and contiguous markets.

However, we are concerned about O’Reilly’s huge level of inventory, which constituted 83.3% of current assets as of Dec 31, 2012. In addition, the stores of O’Reilly are concentrated in a few locations in the U.S. mainly Texas and Calif. Thus, any adverse economic and weather conditions can impact its earnings. In addition, rising competition from automotive retailers including AutoZone Inc. (AZO - Analyst Report) and Advance Auto Parts Inc. (AAP - Analyst Report) is a matter of concern for the company.

Other Stocks to Look For

Currently, CarMax Inc. (KMX - Analyst Report) with a Zacks Rank #2 (Buy) are performing well in the same industry where O’Reilly operates.

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