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Bull of the Day

As a leader in their industry and a top Zacks Rank among peers, O’Reilly Auto (ORLY - Analyst Report) is a stock that should not be ignored.  The company has beaten the Zacks Consensus Estimate five earnings reports in a row, exceeding expectations by an average of 5%.   More than that, they are in a space with strong growth and a somewhat defensive correlation to the broad market.

A Growing Industry
Things have come a long way since 1957 when O’Reilly was first formed.  In 1960, there were 74 million cars on the road and 180 million people in the U.S.  Today, there are over 300 million people in the U.S. and close to 250 million registered vehicles on the roads.

The DIY (do it yourself) auto repair market has grown along with the auto, truck and motorcycle industry and so have the local shops (maintainers) that do the work for us.

With parts and repair costs dropping and cars becoming more complicated, the ratio of DIY to DIFM (do-it-for-me) has been dropping as well.  O’reilly is positioned to take advantage of that trend by catering to non-agency maintenance shops in addition to the DIYers looking to put in a new battery , perform minor maintenance or detail their rides.

Earnings and Revenue
ORLY currently trades at roughly 21 times trailing earnings, with a forward multiple around 18, roughly the same valuation and growth outlook as we saw in February last year with shares $25 lower.

On February 2nd the company reported its 20th consecutive year of comparable store sales growth, record revenue and operating income since becoming a public company in April of 1993.  Quite a feat when you consider the two recessions they have endured.

O’Reilly’s sales for the fourth quarter ended December 31, 2012, increased $97 million, or 7%, to $1.49 billion from $1.39 billion for the same period one year ago. Gross profit for the fourth quarter increased to $750 million (or 50.4% of sales) from $695 million (or 49.9% of sales) for the same period one year ago, representing an increase of 8%.

Net income for the fourth quarter ended December 31, 2012, increased $10 million, or 8%, to $133 million (or 8.9% of sales) from $123 million (or 8.8% of sales) for the same period one year ago.

Diluted EPS for Q4 2012 increased 21% to $1.14 on 116 million shares versus $0.94 for the same period one year ago on 130 million shares.

Their industry is ranked 12th out of 265 and the stock is a Zacks Rank Buy #1. 

O’reilly’s Future Growth
With 4,000 locations, O’reilly is second only to AutoZone (5,029) in store count.  But the industry is still fragmented and much of it is open for O’Reilly to capture either organically or by acquisition.  In fact, the top 10 auto parts chains only account for 45% of the total industry’s $231 billion per year business. 

With over $6 billion in sales in 2012, the company is looking to expand their store count by 190 and capture 6.6 to 6.7 billion in sales in 2013.  Same store sales growth is expected to be 3%-5% in 2013 compared to 3.8% in 2012. 

Margins have been steadily on the rise since 2008, with adjusted operating margins coming in at 15.8% in 2012 and 15.8-16.2% margin expected for FY2013.

Even CNBC’s Jim Cramer is lovin’ on ORLY an gave it a “buy” nod during his lightening round on March 12th. 

The Charts
Early last year I wrote about ORLY with the stock in the low $80 range as a good momentum play.  Shares quickly gained over 30%, peaking at over $106.   It feels like a similar setup this time around with the stock consolidating close to its highs and poised for a possible breakout. 

O’Reilly has formed a nice support base around the $100.50 level, below that you have some stickiness at the top of the recent earning’s gap at $99.30 and them the 50 and 200 day moving averages below at $96.77 and $90.57 respectively. 

The most recent breakout occurred on January 24th when the 50 day jumped above the 200.  A solid earnings report was the propellant soon after.   

While ORLY’s fundamentals are compelling and the techncials show good support, the stock will still be subject to market fluctuations, though it tends to be “less market sensitive” with its low beta of 0.43.  This adds a defensive element to the shares, but keep in mind that any sharp moves in either direction made by the broad market will most likely carry ORLY with them.

Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”.  You can discover more of his insights and recommendations through his two portfolio recommendation services:

Zacks Whisper Trader- Learn to buy stocks likely to have robust earnings BEFORE they report.

Zacks TAZR Trader – Technical Analysis + Zacks Rank. Best of both worlds approach to find timely trades.

Follow Jared A Levy on twitter at @jaredalevy

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