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Bear of the Day: O'Reilly Automotive (ORLY)

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O'Reilly Automotive (ORLY - Free Report) is one of the largest specialty retailers of automotive aftermarket parts, tools, supplies, equipment, and accessories in the US, serving both professional service providers and do-it-yourself customers.

Since I'm a Chicago boy who grew up with NAPA auto parts stores, I've still never set foot in an O'Reilly shop and was surprised to find they now operate 4,935 stores in 47 states. And, as further testament to my ignorance of this great business story, they started in Springfield, MO in 1957, going public in 1993.  

History of a Great American Immigrant Success

While ORLY is a Zacks #5 Rank Strong Sell because estimates dropped sharply after weak sales comps in July, I want to share a little about this amazing growth story in case you were as ignorant as I was. We'll come back to the company and stock outlook in a moment.

I borrow this little bit of history from the company website...

Michael Byrne O'Reilly immigrated to America in 1849, escaping from the hard times of the potato famine, which struck Ireland in 1845-46. Settling in St. Louis, he worked his way through school to earn a law degree, and then pursued a career as a title examiner. His son, Charles Francis O'Reilly, attended college in St. Louis and went to work in 1914 as a traveling salesman for Fred Campbell Auto Supply in St. Louis.

By 1924, Charles had become familiar with the Springfield area, having traveled by train to sell auto parts throughout the territory. He recognized the region as an area of growth and opportunity and asked to be transferred there. By 1932, he had become manager of Link Motor Supply in Springfield. One of his sons, Charles H. (Chub) O'Reilly, had also joined the company. Together they provided the leadership and management that made Link the predominant auto parts store in the area.

In 1957, Link planned a reorganization, which would have included the retirement of 72-year-old Charles F. O'Reilly, and the transfer of C. H. O'Reilly to Kansas City. Since neither agreed with these plans, they made the decision to form their own company, O'Reilly Automotive, Inc.

(end of history excerpt from O'Reilly website)

From those humble beginnings, father and son created a business legacy that an any immigrant patriarch would be proud of.

Now, let's get back to why this company, whose shares have soared from $80 to $290 in four years (summer 2012 to summer 2016), are down 29% YTD. My colleague Neena Mishra wrote about ORLY as the Bull of the Day back in July after their sales comps report and before their Q2 earnings report. Here's what she said then...

Shares Plunge After Weak Sales Results

On July 5, the company reported its Q2 comparable store sales results, which were much weaker-than-expected.  The stock fell almost 20% and is down about 34% year-to-date (actually trading down to $170 after that report).

“After exiting the first quarter and entering April on an improved sales trend, we faced a more challenging sales environment than we expected for the remainder of the quarter. Our second quarter comparable store sales results of 1.7% represent an improvement over our first quarter, but fell below our guidance of 3% to 5%, due to what we believe were continued headwinds from a second consecutive mild winter and overall weak consumer demand,” said the CEO.

Falling Estimates

Analysts have slashed their estimates for the company after weak guidance.  Zacks Consensus Estimates for the current and next fiscal year have fallen to $11.83 per share and $13.10 per share from $12.26 and $13.73 respectively, 30 days back.

The company has missed in three out of past four quarters. The average negative quarterly surprise for the past four quarters is 2.3%.

The Bottom Line

Auto parts suppliers are facing increasing headwinds due to rising competition from Amazon. But there are several other factors that have resulted in bearish outlook for the industry. In addition to two consecutive mild winters, better vehicle quality, a smaller number of older cars and weak consumer demand from certain demographic groups have resulted in weak demand for auto parts.

(end of Neena Mishra's report on July 17)

ORLY actually delivered a 7% EPS beat on July 26, but cut the outlook for the remainder of the year.

O’Reilly Automotive reported adjusted earnings of $3.10 per share in the second quarter of 2017, beating the Zacks Consensus Estimate of $2.90. Net income improved 10% to $283 million (12.3% of sales) from $258 million (11.8% of sales) in the second quarter of 2016.

Quarterly revenues went up 5% to $2.29 billion from $2.18 billion a year ago. Revenues were almost on par with the Zacks Consensus Estimate. Comparable store sales increased 1.7% in the reported quarter compared with a 4.3% rise in the prior-year quarter.


For the third quarter of 2017, O’Reilly projects earnings per share in the range of $3.10-$3.20. The company expects consolidated comparable store sales to increase 1–3%.

For full-year 2017, the company expects earnings per share in the band of $11.77-$11.87 compared with the previous expectation of $12.05-$12.15.

O’Reilly projects consolidated comparable store sales increase in the range of 1-2% during the year. The company anticipates revenues in the band of $8.9-$9.1 billion compared with the previous expectation of $9.1-$9.3 billion. For 2017, the gross margin guidance is in the range of 52.5-52.9% and operating margin is expected to be 19.1-19.5% compared with the previous estimate of 20.1-20.5%.

O’Reilly reiterated its capital expenditure to be within the range of $470–$500 million. However, for 2017, it expects free cash flow to be between $830 million and $880 million compared with the range of $930-$980 million expected earlier.

Cooker's bottom line: In her bottom line, Neena Mishra noted the rise of competition from Amazon and better quality vehicles as threats to the auto parts companies' terrific run in this bull market. As an Alibaba (BABA - Free Report) shareholder, I'm hearing that auto buffs are able to order any part, at the best price, anywhere around the world and the shipping is minimal using Alipay. While we may not be at a cycle top for the economy and retail, the auto parts stores may have seen their top and should be avoided until the earnings estimates stop going down and start to head back up.

Disclosure: I own BABA shares for the Zacks TAZR Trader service.

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