O'Reilly Automotive: A Look at Long-Term Catalysts

O'Reilly Automotive's (ORLY, Financial) comparable store sales results increased by 5% for every quarter of 2014 and concluded at 6% for the entire year.

What's driving growth

Considering the previous record of last 3 quarters, undercar repairs for ride control, chassis, driveline and brakes were major contributors to its robust 6.3% comparable store sales expansion during the fourth quarter, which also surpassed the company’s previous guidance of 3% to 5%. The significant sales for the undercar segments, coupled with widespread traction in all hard parts segments, resulted in 6% growth of comparable store sales for the year.

The continued significant efforts of O’Reilly to optimize its current product and service offerings along with the launch of new and unique products is believed to expand the customer footfall at the company stores and thus drive top line growth.

The automotive major’s significant capability to profitably expand market share, coupled with the cautious cost control, delivered robust earnings per share growth of 26% in the quarter, depicting the company’s 24th successive quarter, with earnings per share expansion of over 15%.

In the quarter, O'Reilly’s comparable store sales held solid at 6.3% due to robust comps growth of 5.4% during the fourth quarter of 2014. Sales volumes for the quarter remained somewhat steady. But, comparable store sales percentages lowered slightly for December owing to sharp headwinds from its greatest comparisons. Both the company’s professional comparable store sales and DIY sales were significantly solid for both the quarters and for the complete year.

The ongoing robust efforts of O'Reilly to reduce expenditures while growing its earnings through the introduction of new product lines and executing strategic acquisitions is estimated to expand the company market share and drive impressive shareholder returns.

Considering the DIY business segment, O’Reilly delivered robust comparable traffic expansion for both the quarter and for the complete year primarily driven by the management’s keen focus on exploring growth opportunities in this business segment coupled with the steady health enhancement for the DIY customers.

Moving ahead, O’Reilly expects to continuously expand its average transaction basket size, primarily driven by higher repair cost and enhanced parts complexity, which is firmly believed to be a long-term industry growth driver.

The impressive growth of the DIY business segment and the planned expansion of the company’s product and service offerings highlight the significant customer traction for innovative set of product and service offerings of O’Reilly and make the stock appealing to the investors.

Strong guidance

O’Reilly maintains its comparable store sales guidance for the first quarter of 2015 and the complete year in 3% to 5% range. The company is particularly encouraged by its belief that miles driven would continuously grow at a reasonable rate and enable demand expansion in its industry, supported by the current lower gas prices and betterment in the customer’s health.

O’Reilly has a total of 4,257 stores in 42 states as of June 30, 2014 with approximately 25 distribution centers, $6.5 billion of total assets as of June 30, 2014 and $16 billion of market capitalization as of August 18, 2014.

The forecasted increase in the miles driven as well as the accelerated launch of new and innovative company stores is believed to expand O’Reilly global presence and drive improved shareholder value.

Year-till-date of 2014, O’Reilly has opened a total of 91 new stores with 5.7% of comparable store sales compared to just 3.6% during the same period last year. It also delivered $461 million of free cash flows during the year.

Going forward, O’Reilly has a Zacks Rank #2 (Buy) which further signifies the outperformance potential of the company. It not only has double digit earnings growth potential, but its solid Zacks rank indicate that the analysts are extremely positive about the future growth prospects of the company.

Conclusion

Overall, the investors are advised to invest into the O’Reilly Automotive, Inc. looking at the logical company valuations with trailing P/E and forward P/E ratios of 29.71 and 22.46 respectively, which is also comparable to the industry’s average P/E of 21.86, going forward.

The PEG ratio of 1.62 signifies slightly slower and costlier company growth compared to marginally better industry’s average of 1.46. The profit margin of 10.78% represents healthy company profits. However, O’Reilly needs to optimize its debt-laden balance sheet with huge total debt of $1.40 billion against weak total cash of $250.56 million only, restricting the company to plan for future growth investments.