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

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O'Reilly Automotive (ORLY) 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.

Founded in 1957, the company IPO’d in April 1993. As of March 31, 2017, they operated 4,888 stores in 47 states.

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.

“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.

The company reports second quarter earnings on July 26.

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 quartere. 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.

The industry “Automotive - Retail and Wholesale - Parts” is currently ranked 249 out of 265 Zacks industries (bottom 6%), suggesting potential underperformance in the short-to-medium term. With the fundamental shift in the auto industry towards smart cars with more digital features, traditional auto suppliers will face rising challenges ahead.

It would be better for investors to stay away from this stock and the industry as of now. There is no Zacks #1 stock in this industry.

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