Morningstar | O'Reilly's On-Track 1Q Results Leave Our Outlook in Place; Shares Rich
We do not plan a large change to our $307 fair value estimate for narrow-moat O’Reilly Automotive after the company reported first-quarter earnings that indicate it is on track to meet our full-year expectations. Our long-term forecast still calls for mid-single-digit annual sales growth and 20% operating margins, on average, over the next decade. While our outlook for the firm and the industry remains favorable, we believe O'Reilly's current share price assume a degree of perfection with which we are uncomfortable, and so we suggest investors await a more attractive entry point to build a position in this best-in-class auto-parts retailer.O'Reilly posted 6% sales growth against a flat operating margin (at 18.5%). Management reaffirmed full-year guidance of $10.0 billion-$10.3 billion in sales against an 18.7%-19.2% operating margin, resulting in diluted earnings per share of $17.37-$17.47. Our preannouncement estimates for 2019 are in line, calling for $10.2 billion, 19.1%, and $17.89, respectively (unlike guidance, we incorporate assumed share repurchases through the rest of the year; excluding these projected buybacks, our target is $17.50 in EPS).
O’Reilly and the industry should benefit from fairly normal 2018-19 winter weather conditions through the rest of the year, as parts strained by cold temperatures gradually fail and potholes exact punishment on undercar components. Against the backdrop of continuing miles driven growth (0.4% in 2018), low unemployment, and persistently high vehicle age (11.7 years on average), we believe industry conditions remain a tailwind. While escalating gasoline prices, modest and delayed tax refunds, and inflationary strain on lower-income customers (offset to some extent by rising wages) are potential sources of short-term risk, we suspect motorists’ dependence on their vehicles will keep O’Reilly and its peers insulated over a longer horizon.
We have a favorable view of O’Reilly’s purchase of a new building in Mississippi, which will be converted into a distribution center serving the Memphis area. Together with a new Ohio facility and expansions to two existing distribution centers, we are encouraged that O’Reilly continues to invest in its industry-leading parts availability. We see O’Reilly’s ability to provide a wide range of slow-turning components quickly as a key point of differentiation from smaller rivals, an advantage that should help the business grow faster than our low-single-digit expectations for the industry (implying gradual market share gains).
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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