PEZ - O'Reilly Automotive: Pedal To The Metal On This Auto Retailer

Summary

• Buyback stocks are finally starting to show their muster as the blackout window closes on share repurchases.
• One such buyback stock reports Q3 results Wednesday night, and forecasts see higher per-share profits.
• Price-action is very strong on ORLY with a bullish cup and handle breakout earlier this week.

Buyback stocks are perking up. The Invesco BuyBack Achievers ETF ( PKW ) is up about 10% off its September low as stocks have rebounded in October. One of its larger holdings is making fresh all-time highs this week ahead of a Q3 earnings report and as folks drive back to offices around the country.

Buyback Equities On The Move

According to Bank of America Global Research, O'Reilly Automotive ( ORLY ) is the nation's second-largest auto parts retailer with more than 5,700 stores and $13.3 billion in 2021 revenue. Founded in 1957 and headquartered in Springfield, MO, O'Reilly has an enviable balance between DIY and commercial, which gives the company a relatively less discretionary revenue split.

The Midwest-based $49.1 billion market cap Automotive Retail industry company within the Consumer Discretionary sector trades at a high 24.6 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal .

O'Reilly benefits from cars on the road that now average more than 12 years in age, according to KBB . Thus, drivers must invest in parts and services to ensure their vehicles stay safe. That macro tailwind is coupled with the firm's strong supply chain and current inventory levels, helping to promote strong sales.

The company can continue to gain market share from independent auto shops and other major industry players. Downside risks include competition from online retailers, weakening miles-driven stats and the availability of new cars at competitive prices, and margin compression from raw material price increases.

On valuation, analysts at BofA see earnings having risen just slightly in 2022 following strong EPS advancements in 2021 and 2022. Beefed-up earnings growth is seen as returning in 2023 and 2024, though. The Bloomberg consensus forecast is about in-line with what BofA predicts.

Investors should not, however, expect the firm to pay out a dividend in the near term despite solid free cash flow. With both GAAP and operating P/Es near 20, the stock's PEG ratio is not that high at 1.8, though it's elevated compared to its peers, according to Seeking Alpha . Overall, I see the valuation as reasonable given the growth outlook.

O'Reilly: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, Wall Street Horizon's corporate event data show a confirmed Q3 earnings date of Wednesday, Oct. 26 AMC with a conference call Thursday morning. You can listen live here . Volatility catalysts don't end there, though. O'Reilly's management team is expected to speak at the Gabelli 46th Annual Automotive Aftermarket Symposium from Oct. 31 to Nov. 3.

Corporate Event Calendar

The Options Angle

Digging into the earnings report and expected stock move, Option Research & Technology Services (ORATS) shows a consensus earnings forecast of $8.47 per share vs. an EPS figure of $8.07 reported in the same period a year ago. Unfortunately, the stock has missed analyst estimates in the previous two quarters, but there have been a solid four analyst EPS upward revisions since ORLY last reported in July.

In terms of the expected share price swing after Wednesday night's release, options traders have priced in a 5.0% move up or down using the nearest-expiring at-the-money straddle. That's tied for the biggest such move dating back to early 2021.

ORLY: Options Price In A Significant Move Post-Earnings

The Technical Take

ORLY is one of the few stocks around the world notching new all-time highs. Shares broke above key resistance at the $750 mark earlier this month. A bullish price objective of $934 is now triggered based on the range from $750 at the high to the May 2022 low of $563. Notice how the stock formed a bullish inverse head and shoulders pattern during the second quarter. ORLY then rallied to $750, the April high, before retreating back to its key 200-day moving average in September.

A bullish cup and handle breakout sent shares to fresh highs, and the chart looks favorable for further upside. Keep your eye on the $750 level for future support.

ORLY: Bullish Breakout From A Cup & Handle Pattern

The Bottom Line

ORLY looks decent from a valuation perspective and great on the charts heading into earnings. Overall, I'm bullish on the aftermarket auto retailer so long as the stock is above $750. It's also possible, in my opinion, that the firm could pay a dividend at some point in the future based on consistent free cash flow.

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