Morningstar | Solid End to 2018 Leaves Our Favorable Long-Term Outlook Intact for O'Reilly; Shares Somewhat Rich
With 2018 results meeting our targets, our $292 per share valuation for narrow-moat O'Reilly should not change significantly. We still expect mid-single-digit annual sales growth and 20% operating margins, on average, over the next decade. We continue to see O'Reilly as the best in its class, with a balanced sales mix and leading distribution and operational capabilities; however, we suggest investors await a more attractive entry point.O'Reilly posted $9.54 billion in sales against a 19.0% adjusted operating margin and diluted EPS of $16.10, near our $9.55 billion, 18.9%, and $16.16 targets. Management set 2019 guidance at $10.0 billion to $10.3 billion in sales against an 18.7% to 19.2% operating margin, resulting in diluted EPS of $17.37 to $17.47. Our pre-announcement estimates are in line, calling for $10.1 billion, 19.1%, and $17.82, respectively (unlike guidance, we incorporate assumed share repurchases, accounting for the difference between our forecast and the indicated range).
Management expects low-single-digit auto part inflation in 2019, continuing increases that started in late 2018 and buck a flat pricing environment that had held for several years. We are encouraged that O'Reilly has been able to pass on tariff-related price hikes, and that its scale has often allowed it to keep procurement cost increases for affected parts below the full tariff amount. We believe the favorable, rational pricing environment will continue, particularly as vendors increasingly turn to minimum advertised price and electronic minimum retail price structures to fend off cut-rate online sales. While we have long argued that O'Reilly and its peers are insulated from digital disruption (a result of motorists' need for guidance and professional clients' requirement for near-instant delivery and price insensitivity), the protections should create further headroom for the firm to use an omnichannel strategy that leverages its store network and high standard of service.
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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