Morningstar | Expected 3Q Leaves Our Outlook Intact for O'Reilly; Shares Somewhat Rich
Our $282 per share valuation for narrow-moat O'Reilly should not change significantly after it posted third-quarter earnings. Our long-term forecast is also intact, calling for 5% annual revenue growth and 20% operating margins, on average, over the next decade. Although our enthusiasm for the firm's operational prowess, balanced sales mix, and best-in-class distribution network (which O'Reilly's new plans to open two new distribution centers by 2020 should augment) is undiminished, we suggest investors await a more attractive entry point.Year to date, O'Reilly has seen $7.2 billion in sales against a 19.2% operating margin. Management expects $9.4 billion to $9.6 billion in 2018 sales against an 18.5% to 19% operating margin, resulting in diluted EPS of $15.95-$16.05 (the revenue and profitability ranges are unchanged, but the latter estimate is up from $15.70 to $15.80 due to share repurchases and a lower assumed tax rate). Our announcement estimates are in line, calling for $9.55 billion, 18.9%, and $15.96, respectively.
Management indicated that the industry pricing environment remains rational amid modest commodity-driven inflation and the first effects of tariff-related price increases. We suspect the favorable dynamic to continue as tariffs create further upward pricing pressure, with the industry successfully passing on cost increases. As O'Reilly customers repairing their vehicles themselves tend to do so for economic reasons, we anticipate their economic situation may require deferral of some nonessential maintenance if cost increases coincide with higher fuel prices. However, the opportunity cost of not having access to a vehicle is especially high for such customers, and so we suspect retailers have ample opportunity to pass cost increases through as keeping the aging car or truck on the road is vital. Professional clients are also not price-sensitive, in our view, as they merely pass along part costs to their customers (with a markup).
While both segments contributed to growth, O'Reilly's DIFM sales continued to drive results. We believe this is consistent with our view that the 2017 industry sales slump was partly attributable to the below-normal number of vehicles sold during the financial crisis passing into retailers' sweet spot (cars and trucks aged roughly 7-8 years and older). As does O'Reilly's management team, we suspect that recently out-of-warranty vehicles are more likely to be serviced professionally (though increasingly away from the more expensive dealership). So, we see the DIFM strength as reflecting the aging of larger, post-crisis vehicle sales cohorts into retailers' target market, and expect DIY results to see similar benefits in the years to come.
O'Reilly Automotive is a retailer of automotive aftermarket parts, tools, supplies, equipment and accessories, selling its products to both do-it-yourself and service provider customers. The company's stores carry a product line, including: new and remanufactured automotive hard parts and maintenance items, such as alternators, batteries, brake system components, belts, chassis parts, driveline parts, engine parts, fuel pumps, hoses, starters, temperature control, water pumps, antifreeze, appearance products, engine additives, filters, fluids, lighting, oil and wiper blades; and accessories, such as floor mats, seat covers and truck accessories.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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