Expansion Into Canada And Automation Will Strengthen Future Operations

Key Takeaways

• Expansion and increased capital expenditures aim to drive revenue growth and boost operational efficiency in key markets.
  
• Automation and strategic share repurchases may enhance cost efficiencies, margins, and earnings per share.
  
• Economic pressures and rising costs, including tariffs and self-insurance, may suppress margins and revenue growth despite necessary strategic investments.

Catalysts

Operates as a retailer and supplier of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States, Puerto Rico, and Mexico.

• Expansion strategy includes significant investment in new store openings across various regions, including the U.S., Mexico, and initial development towards Canada, which could drive future revenue growth.
  
• Increased capital expenditure plans for 2025 indicate investment in distribution capabilities and hub store networks, potentially boosting operational efficiency and supporting future sales growth.
  
• Expected growth in professional business due to higher ticket counts and market share gains, which could positively impact revenue and earnings.
  
• Implementation of goods-to-person automation within distribution centers could result in cost efficiencies and improved margins in the long term.
  
• Commitment to share repurchase program remains strong, potentially enhancing earnings per share through reduced share count.

O'Reilly Automotive Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming O'Reilly Automotive's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.3% today to 14.7% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $55.52) by about April 2028, up from $2.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.4x on those 2028 earnings, down from 33.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 14.5x.
• Analysts expect the number of shares outstanding to decline by 2.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

O'Reilly Automotive Future Earnings Per Share Growth

Risks

• The company's revenue may be negatively impacted by persistent economic pressures on consumers, leading to continued softness in discretionary categories such as tools, accessories, and performance parts as observed in 2024.
  
• Increased self-insurance liabilities due to inflation and higher costs in resolving auto insurance claims could suppress net margins and earnings, as seen with the significant $35 million charge in 2024.
  
• Potential future tariff changes, especially concerning China, which accounts for 25-26% of sourcing, could raise costs of goods sold and impact overall gross margins if not effectively managed and passed through to customers.
  
• The cautious economic outlook for 2025 accounts for potential challenges like sustained high price levels, increasing interest rates, or spikes in energy costs, which could further compress consumer spending, affecting revenue growth.
  
• Increasing SG&A expenses due to wage rate pressures and strategic investments in hub stores and technology, while necessary for growth, could reduce operating profit margins if not offset by revenue growth.

Valuation

• The analysts have a consensus price target of $1429.483 for O'Reilly Automotive based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1600.0, and the most bearish reporting a price target of just $920.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.0 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 31.4x, assuming you use a discount rate of 7.5%.
• Given the current share price of $1393.54, the analyst price target of $1429.48 is 2.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.