ORLY: Improving Supply Chain Will Drive Resilient Same-Store Sales Strength

Key Takeaways

• Strategic focus on inventory, distribution, and sourcing diversification stabilizes margins and promotes revenue growth amidst trade challenges.
  
• Expansion and enhanced service drive customer retention and boost long-term revenue potential.
  
• Ongoing global trade uncertainties, competition, and rising costs could pressure O'Reilly's revenue, margins, and market share growth.

Catalysts

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

• O'Reilly's strategic emphasis on inventory and distribution capabilities, including a plan to increase average inventory per store by 5% in 2025, positions the company to maintain high availability and service levels, likely leading to sustained or increased revenue growth.
  
• The company is maintaining its strategy of sourcing diversification, reducing reliance on Chinese products to mitigate tariff impacts, which can help stabilize gross margins by decreasing future cost pressures.
  
• O'Reilly's consistent emphasis on enhancing customer service and operational excellence through training and leadership development is likely to result in higher ticket counts and customer retention, potentially boosting revenue and net earnings.
  
• The proactive management of supplier negotiations to mitigate tariff-related cost increases reflects a focus on maintaining competitive pricing, which should help preserve gross margins even in a challenging trade environment.
  
• The company's commitment to store expansion, with the opening of 38 net new stores across the U.S. and Mexico in the first quarter, supports long-term revenue growth potential by increasing market presence and customer reach.

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 14.2% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $3.0 billion (and earnings per share of $3.78) by about September 2028, up from $2.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.4x on those 2028 earnings, down from 37.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 2.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

O'Reilly Automotive Future Earnings Per Share Growth

Risks

• The uncertainty surrounding tariffs and international trade deliberations could lead to increased product costs, which may impact the company's revenue and gross margins.
  
• Delays in tax refunds and unfavorable weather patterns were highlighted as factors causing volatility in sales, which could affect future revenue stability.
  
• The possibility of accelerated inflationary pressures on store-level pay and benefits, along with maintenance and occupancy expenses, could lead to increased SG&A costs, impacting net margins.
  
• Ongoing supply chain uncertainties, specifically related to potential tariff changes and product sourcing from China, pose risks to cost management and gross margins.
  
• Elevated competition from both national and independent players, including potential market shifts and M&A activity, may impact O'Reilly's ability to sustain its revenue growth and market share.

Valuation

• The analysts have a consensus price target of $106.955 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 $120.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.5 billion, earnings will come to $3.0 billion, and it would be trading on a PE ratio of 36.4x, assuming you use a discount rate of 8.3%.
• Given the current share price of $106.92, the analyst price target of $106.95 is 0.0% 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.