O’Reilly Automotive (NASDAQ:ORLY) was featured as a top pick in auto-parts retailing in April.
When the $22.7 billion specialty retail company reported its first quarter fiscal 2017 last week, it delivered 2.9% sales growth to $2.16 billion and 3.7% profit growth to $264.9 million – a 12.3% profit margin albeit similar profitability when compared to the year-prior period.
“On our Feb. 7 conference call, we discussed the volatility weather brings to our first-quarter results. Based on mild January temperatures and the headwind that created in our business, we reduced our quarterly comparable store sales guidance for the first quarter to 2% to 4%. The unseasonal weather continued in February, and the absence of typical spring weather in many of our markets in March, combined with the dislocation of tax refunds, continued to create headwinds for the remainder of the quarter. We believe these headwinds were the primary drivers of our below expectation comparable store sales of 0.8%.
“With these transient headwinds behind us and the onset of our spring selling season, we are establishing our second quarter comparable store sales guidance of 3% to 5% and maintaining our full-year comparable store sales guidance of 3% to 5%. We continue to strongly believe our team’s strength and ability to consistently execute our business model, along with the positive industry factors of an aging vehicle fleet, increasing number of vehicles on the road, relatively low gas prices and low unemployment rates will continue to underpin our solid, long-term profitable growth.” – Greg Henslee, O’Reilly’s CEO
As observed, several fiscal 2017 expectations are in line with O’Reilly’s recent fiscal years of operations. Nonetheless, the company sees its comparable store sales lower at a midpoint of 4% vs. 2016’s 4.8% and a 12.8% diluted earnings-per-share growth taken at the midpoint of projections vs. 2016’s 17.01% growth.
O’Reilly’s shares fell 2.97% days after its earnings release.
O’Reilly has failed to provide any gains for its shareholders so far this year with 10.9% total loss delivered compared to Standard Poor’s 500 index’s 7.2% total gains (Morningstar data). In the past five years, however, the company outperformed the broader index by five percentage points.
O’Reilly is overvalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 22.6 times vs. the industry median of 21.2 times, a price-book (P/B) value of 15.9 times vs. 1.7 times and a price-sales (P/S) ratio 2.8 times vs. 0.68 times.
The company has paid no dividends in the past three fiscal years.
O’Reilly Automotive was founded in 1957 by Charles F. O’Reilly and his son, Charles H. “Chub’’ O’Reilly Sr., and initially operated from a single store in Springfield, Missouri.
O’Reilly Automotive – or O’Reilly – is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment and accessories in the U.S., selling its products to both do-it-yourself and professional service provider customers, also known as the company’s “dual market strategy.”
The company has one reportable segment.
On average, O’Reilly has three-year sales growth of 8.9%, profit growth of 15.7% and profit margin average of 11.5% (Morningstar data).
O’Reilly’s comparable-store sales are calculated based on the change in sales of stores open at least one year and excludes sales of specialty machinery, sales to independent parts stores, sales to team members, sales from Leap Day.
In the first quarter, O’Reilly had 0.08% in comparable-store sales growth vs. 6.1% in first-quarter 2016. The company seemed to see a good recovery heading into the remaining quarters of fiscal 2017 as its midpoint expectations for the year surpass fiscal 2016’s 3.7% figure.
Cash, debt and book value
As of March, O’Reilly had $27.5 million in cash and cash equivalents and $1.98 billion in debt with a debt-equity ratio of 1.4 times vs. 0.97 times the same period last year.
Of O’Reilly’s $7.2 billion assets 10.9% were labeled as goodwill as the company had a book value of $1.42 billion vs. $1.94 billion in first-quarter 2016.
In first-quarter 2017, O’Reilly had its cash flow from operations decline by 25% to $376.7 million. The company experienced more cash (out)flow from its inventory and other.
Capital expenditures for the recent quarter were $110.6 million leaving O’Reilly with $266.1 million in free cash flow compared to $399 million in first-quarter 2016.
The company allocated almost twice – or 178% – its free cash flow in share repurchases for the period along with having a three-year average free cash flow payout (for share repurchases net of tax benefits and issuance costs) of 119%.
During first-quarter 2017, O’Reilly spent $490 million in repurchasing 1.8 million of its shares at an average share price of $268.09 vs. today’s share price of $248.15. Nonetheless, the company spent $7.43 billion since its share repurchase program in 2011, having repurchased 59.1 million shares or $125.75 a share.
According to filings, O’Reilly has approximately $322 million remaining under its current share repurchase authorization.
In review, O’Reilly has been consistently growing and more profitable in recent fiscal years of operations. Comparable-store sales, meanwhile, were significantly weak when compared to last year’s figures. The company seems to be positive about its full-year fiscal 2017 figures.
Minus these attractive income sheet items, O’Reilly carried a lot more leveraged balance sheet during the recent quarter despite not having any additional debts in fiscal years 2014 and 2015. Also, the company also appeared to have overpaid in its share repurchase program for the recent quarter.
Meanwhile, 22 analysts had an average price target of $307.05 – a 23.7% upside from today’s share price.
Having applied the company’s midpoint expected sales growth rate and its five-year price-sales multiple average followed by a 20% margin would indicate a value of $19.16 billion or $209.8 per share.
In summary, O’Reilly is a hold with $300 share price value.
Disclosure: I do not have shares in the company mentioned.
Start a free seven-day trial of Premium Membership to GuruFocus.
About the author:
A doctor in physical therapy (DPT) with a passion for finance. Value seeker. Long only. Global investing. Long-term investing.
Attempts to dissect company filings one company a day.
For quicker reading–jump ahead to an article’s conclusion.
One company (review) a day keeps the speculation (hopefully) away.
Would typically invest $500 to $3000 of own money per buy recommendation.