Summary
- Recent results were impressive.
- Major tailwinds remain intact.
- New store growth continues.
- I turn bullish on the stock.
Earnings Review
Recently, O’Reilly Automotive released Q1 FY15 operating results. Overall results were impressive to say the least, as the company exceeded its guidance by a considerable margin. Comparable sales guidance was in the range of 3% to 5% – the company achieved a 7.2% increase. Considering strong FY14 comps, such a performance is remarkable indeed. The company also surpassed analyst estimates, posting revenue of US$1.9b, a 9.8% y/y increase, beating estimates by US$40m. On the profitability side, the company achieved Q1 EPS of US$2.06, beating estimates by 12 cents.
Major tailwinds remain intact
Being an aftermarket auto part supplier, major tailwinds that drive the demand for the company’s products are interest rates, miles driven, and average vehicle age.
Interest rates are an important demand driver as a large majority of consumers would finance a vehicle purchase with a loan. Considering that interest rates remain at extremely depressed levels, largely thanks to the Fed’s QE program, demand for auto vehicles should remain strong in the near-term. Auto sales data supports this assertion. Although recent FOMC meetings have hinted that a rise in interest rates is possible by late-2015, prominent economists have opined that the imminent rate hike would be a gradual one. Hence, demand for automotive vehicles would not decrease by that much in the event of a rate hike. This naturally benefits ORLY as the company provides aftermarket auto parts to DIY users and professionals.
In an earlier article, I provided some detail regarding vehicle miles driven. Considering that auto sales have remained strong, vehicle miles driven is likely to increase in the near-term. As vehicles travel across longer distances, this increases the likelihood that said vehicle requires replacement of parts. The recent oil price shock and continued depression will ensure that vehicle miles driven increases further. Therefore, demand for ORLY’s products should increase in the near-term, driving the company’s top-line.
As for average vehicle age, IHS predicts that average vehicle age will remain at 11.4 years in 2015, and increase to 11.7 years by 2019. As vehicles age, this also increases the probability that said vehicle would require a replacement of parts. Management has identified that consumers have been focused on repairing their existing vehicles, which bodes well for the long-term demand of the company’s products.
As major tailwinds remain intact, I expect continued strong top-line performance for the company in the next few quarters.
New store growth
The company continues opening new stores, increasing its geographic footprint. In the past quarters, 67 new stores were opened (total stores number over 4000). Management intends to concentrate growth efforts in states such as Florida, California, and Texas. As the company has consistently managed to execute its business strategy in other states, I have complete confidence that new store growth would allow further top-line expansion. – Seekingalpha.com