O’Reilly Earnings: Industry-Leading Distribution Continues to Deliver Organic Growth

We expect to increase our fair value estimate of $700 per share by a low-single-digit percentage for narrow-moat O’Reilly ORLY after the company reported strong third-quarter results highlighted by robust top-line growth. Over the last three months, shares have declined by about 4%, better than the Morningstar US Market Index’s 9% decline and worse than narrow-moat AutoZone’s 1% decline. Still, shares look overvalued, as we think the current price sets a lofty bar for even the best operator in the sector in O’Reilly.

Same-store sales were up nearly 9%, about the same as the second quarter and better than the year-ago quarter of about 8%. Much of the organic growth came from higher average ticket prices. Sales to the professional channel were up midteens, a continuation of strong performance year to date and evidence of O’Reilly’s superior distribution apparatus.

Management again updated 2023 guidance, now calling for same-store sales growth of 7% to 8% and diluted EPS of $37.80 to $38.30 per share, up from 5% to 7% and $37.05 to $37.55, respectively. However, despite a better top line, the effect on our fair value estimate is limited, as the company has increased its full-year capital expenditures guidance to $900 million to $950 million from $750 million to $800 million despite the fact that new-store growth guidance is unchanged at 180 to 190. For 2024, management expects to open 190 to 200 net new stores, which seems achievable to us.

During the quarter, O’Reilly purchased another $800 million in shares during the quarter. The repurchase when prices are above our fair value estimate destroys shareholder value, in our opinion. Still, the company has not sacrificed capital spending to support its growth, leaving our Exemplary Morningstar Capital Allocation Rating intact.