O'Reilly Needs to Get in the AutoZone

A couple of years ago I would have classified my knowledge of automobiles as fairly limited. After spending a year as an auto claims adjuster for an insurance company, I was smarter. But it wasn't until last week that I gained a true appreciation for the impact the automobile has had on the world and where it's headed.

I recently attended the North American International Auto Show, and it was nothing but cars. (Well, I did leave with a BYD light bulb, but that's another story.) In celebration of my time in Detroit, I decided to take a look at auto parts and see if there's an investment idea lurking. O'Reilly Automotive (Nasdaq: ORLY) was founded in 1957 and has more than 3,500 stores in 38 states. AutoZone (NYSE: AZO), which was founded in 1979, has more than 4,400 stores with operations in the U.S., Puerto Rico, and Mexico. While bigger doesn't necessarily mean better, I took a look at a few ratios to get a better idea of which one has its foot on the gas and which one is in need of a jump.

Cash for clunkers?
The cash conversion cycle is one of the best measures of how a company is managing its working capital. It represents the number of days it takes a company to convert raw materials into goods or services, finished goods into sales, and sales into cash. In other words, it measures how long it takes to get cash spent on raw materials back via sales. With this in mind, the lower the number the better:

Source: Capital IQ, a division of Standard & Poor's.

I gave this one a double take, but it's right. Looks like AutoZone's scale and relationships with its vendors allows it to maximize its payment terms. Competitor Advance Auto Parts (NYSE: AAP) falls more on O'Reilly's side of the fence, too, with a five-year average of 120.6.

Operation: efficiency
Operating margin, also known as the EBIT margin (earnings before interest and taxes) is an excellent indicator of operational efficiency. These are the earnings that take into account the company's operating expenses and this can tell us how much the company is spending to operate the business. I mean, let's face it, selling $1 million isn't going to mean much if it costs you $950,000 to do it. So how do these two compare? Here are the figures:

Source: Capital IQ, a division of Standard & Poor's.

Not even close here; AutoZone is managing its operations much more efficiently, and it seems to be getting better over time.

Mmmmm ... turnovers
Inventory turnover is another valuable metric, particularly in retail. It can tell us how often a company's inventory is sold and replaced over a given period of time. Comparing inventory turnover ratios in the same industry can offer some insight as to which company may be performing better; the higher the number, the better the performance. Here's how they turnover:

Source: Capital IQ, a division of Standard & Poor's.

Much less disparity here; looks like they both keep that inventory moving pretty nicely.

One foot on the gas
Based on these numbers, AutoZone looks like it's running a much more efficient motor. That said, these aren't the only metrics to consider when assessing a business. And numbers never tell the whole story. Considerations like management and corporate culture should hold a spot in every investor's process. And I'll continue to seek out winning investments for my Motley portfolio keeping these very same ideas in mind. Wanna talk shop? Swing on by my discussion board; you can also follow me on Twitter.