EUR 850.00 For Business Accounts Only

Morningstar | Strong 2Q for O'Reilly Consistent With Our Long-term View; Shares Fairly Valued

We do not plan to make a large change to our $268 per share valuation for narrow-moat O'Reilly after it posted solid second-quarter results (7% sales uptick, $4.28 diluted EPS versus $3.10 for the same period in 2017). Similarly, our long-term forecast remains intact, calling for 5% annual revenue growth against 20% operating margins, on average, over the next decade. Although we still see O'Reilly as the best operator in its class, we suggest investors await a more attractive entry point.

With performance rebounding after a more seasonable winter, we expect favorable long-term industry conditions to propel results. The vehicle fleet continues to age, and we expect composition headwinds to dissipate as larger new car and truck sales years from 2012 onward displace smaller cohorts in 2008-11 (retailers' sweet spot is vehicles aged roughly 7 or more years). Management indicated that the stronger performance in its professional segment relative to DIY might suggest this dynamic is starting to unfold; we concur, as we also believe newer vehicles' complexity and greater value makes a professional repair more appealing.

While our long-term view for O'Reilly and the industry is favorable, rising fuel prices and tariffs keep us from materially boosting our short-term forecasts despite a strong quarter (4.6% comparable store sales growth versus our 4% full-year mark). Fuel price hikes depress miles driven growth, reducing vehicle wear alongside repair and maintenance budgets. Although we expect O'Reilly and its peers can easily pass tariffs on to customers, we believe such costs will have indirect impacts on the industry by reducing consumers' disposable income for maintenance and discretionary vehicle-related spending if prices for other goods rise materially. Still, we anticipate that scaled retailers will be more able to contain procurement costs than smaller rivals as they leverage their scale, with fleet-related tailwinds acting as a powerful countervailing force.

Management still calls for $9.4 billion-$9.6 billion in 2018 sales but raised its diluted EPS guidance to $15.70-$15.80 from $15.30-$15.40. Prior to the announcement, we expected $9.5 billion and $15.54, respectively, with the latter influenced by leadership's lower-than-expected effective tax rate expectation of 22% to 23%, versus our 23.5%. Using the midpoint of the rate range, our announcement EPS forecast would have been $15.74.