ORLY - O'Reilly: Another Winning Trade Sets Up

2023-04-27 11:30:56 ET

Summary

• O'Reilly Automotive, Inc. produces another beat and raise for Q1.
• Margins are being pressured some, but the immense repurchase program continues to drive earnings and the share price higher.
• Let's continue to be tactical with O'Reilly Automotive, Inc.

We put on a winning trade in O'Reilly Automotive, Inc. (ORLY) at our service a few months ago, netting nearly 20% returns, and we think the stock is a buy on any pullback. We think ORLY is heading over $1,000, fueled by tremendous share repurchases and strong growth.

We think O'Reilly Automotive is relatively recession resistant and could see a bump in business should people decide they want to keep their cars on the road longer. We like buying shares on a pullback toward the $850 range. That said, we think later this year that the market as whole will pull back heavily. Our members were told to lock in profit at $900-$910, and we think you can look to buy the dip.

Long term, ORLY stock is a winner. They have really focused on margins and have boosted shareholder returns through aggressive share repurchases. Shares are a little expensive valuation-wise , but the growth is strong and those aggressive repurchases only fuel EPS gains. The company just put out Q1 results, demonstrating its continued strength.

O'Reilly's Q1 performance

O'Reilly saw a strong Q1 . It was a beat and raise quarter. We love to see beats and raises, particularly on names we recommend for our traders. This quarter was strong yet again, and performance looks set to continue to be strong long term. We think you pounce on any meaningful pullback.

O'Reilly enjoys gross margins and superb sales growth. The company once again exceeded sales expectations overall and exceeded same-store sales expectations. In Q1 2023, O'Reilly saw sales of $3.71 billion, which was a 12.4% year-over-year increase from $3.30 billion a year ago. These results surpassed consensus analyst estimates by $130 million.

We love O'Reilly, as sales continue to reliably grow each year, and we project this growth to continue even in an economic slowdown. It was a record Q1.

Comparable sales are a key measure for any retailer. The fact is that comparable sales improve every year, it seems, barring the pandemic year. We expected at least 9% positive comps based on historical metrics. The comparable sales came in well ahead of our expectations, hitting 10.8%. For 2023, we previously saw 3.5-5.5% comps as likely, but management has continued to guide for 4-6%.

The company is continuing to strategically open new stores for added growth in key markets. They opened another net 57 shops this quarter and O'Reilly Automotive, Inc. now has 5,986 stores in 47 states. The company also operates 43 stores in Mexico, having opened a new one in Q1 there. Continued sales growth is bullish while still projecting 5% comps at the midpoint. Looking ahead to 2023, we still expect another 175+ stores to be opened for the year.

If there is one sign we do see for the bears, it is that ORLY margins have ticked lower in recent quarters. Thus far, it has not been enough to really hinder the growth in earnings, as despite the tick lower, margins remain impressive. O'Reilly has done a great job optimizing costs and boosting margin potential. Inflation has both helped and harmed margins, as input costs have risen, but so as the average ticket price per item available for sale. Gross margins came in at 51.0%, down from 51.8% a year ago. Margins were up 10 basis points from the sequential quarter. This is still strong and led to an 11% increase in gross profit.

Operating income also increased 7% to $517 million, or 13.9% of sales, from $482 million, or 14.6% of sales. So, as you can see, there are moves in operating margin to keep a close watch on. The strong gains in revenue and still 50% plus margins helped EPS grow.

For Q1, we saw EPS rise 15% to $8.28 from $7.17 per share a year ago. This result also beat consensus by $0.25. Frankly, other than the gross and operation margins narrowing, it was once again a strong result. Keep in mind the share repurchases are strong.

O'Reilly invested another $1.1 billion into new purchases at an average price of $819.06 per share. This helped drive EPS to $8.28 in Q1. Given expectations for margins around 51% and sales around $15.35 billion for the year expected, assuming a commensurate level of repurchase activity we see 2023 EPS of $36.00-$37.50. Management was more narrow and has targeted $36.5 to $37.00.

While we would love to see margins in the mid-50% range, management guided for 50.8% to 51.3% margins, the margin power is still strong. The massive repurchases continue to drive the earnings higher, along with the share price.

Final thoughts

O'Reilly Automotive, Inc. is a great long-term investment. In the short-term we have spotted ways to trade it effectively. We remain bullish long-term on O'Reilly Automotive, Inc. stock, but we strongly recommend waiting for a sizable pull back before committing new money. Anything near $850 should be bought up. Let's continue to be tactical.

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