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O'Reilly to Gain From Store Openings, Soaring Expenses a Woe

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On Apr 9, we issued an updated research report on O'Reilly Automotive, Inc. ORLY.

This automotive aftermarket parts’ specialty retailer is poised to gain from the opening of new stores and expansion of the distribution network. This will help it to penetrate in existing markets and expand in new and contiguous ones. In 2017, O'Reilly opened 198 new stores while planning to open 200 more outlets in 2018.

Further, the company boasts a competitive edge due to the dual-market strategy by serving both Do-it-Yourself (DIY) and Do-it-for-Me (DIFM) customers. Its dual-market stores allow to expanding into large markets by offering professional knowledge for DIFM customers, including commercial service providers. It also caters to the scarcely populated areas that attract less competition by its well-known portfolio brands.

O'Reilly Automotive, Inc. Price and Consensus

O'Reilly Automotive, Inc. Price and Consensus | O'Reilly Automotive, Inc. Quote

In fourth-quarter 2017, O'Reilly witnessed 4% year-over-year rise in sales to $2.19 billion and surpassed the Zacks Consensus Estimate. Moreover, the adjusted earnings were $2.9 per share, beating the same. The bottom line was $2.59 in the prior-year quarter.

The company anticipates earnings per share of $3.55-$3.65 for first-quarter 2018, which is expected to release on Apr 25, while the figure for full-year 2018 is expected to be $15.1-$15.2 compared with $12.67 in 2017.

The stock has seen the Zacks Consensus Estimate for quarterly and annual earnings being revised 0.3% downward and 1% upward, respectively, over the last 60 days.

However, continuous rise in expenses, due to the payment of incentive compensation, professional service fees and additional capital expenditure, are hurting O'Reilly’s profit margins. Also, much of its cash is locked in inventories, hampering a significant part of current assets that can affect the short-term liquidity of the company in periods of low sales.

Moreover, the company’s presence only in the United States, majorly in Texas and California, makes its business sensitive to the economic and weather conditions of these regions. Bad weather condition discourages customers, majorly DIY customers, from visiting company stores.

Price Performance

In the last three months, shares of O'Reilly have outperformed the industry it belongs to. During the period, its stock has edged down 10.6% in comparison with the industry’s decline of 12.9%.


Zacks Rank & Key Picks

O'Reilly carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the auto space are BMW AG BAMXF, Tenneco Inc. TEN and Standard Motor Products, Inc. SMP, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BMW has expected long-term growth rate of 4.5%. In the last three months, shares of the company have risen 1.6%.

Tenneco has expected long-term growth rate of 13.5%. Over a month, shares of the company have gained 0.6%.

Standard Motor has expected long-term growth rate of 6%. Shares of the company have risen 4.7% over the last three months.

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