Here's How O'Reilly Performed In 2014

Summary

• O’Reilly grew its revenue, net income and free cash flow at a solid pace.
• O’Reilly grew sales by adding locations and boosting business at established stores.
• O’Reilly kept costs under control.

On Feb. 4 automotive retailer O'Reilly Automotive (NASDAQ: NASDAQ:ORLY) came out with its FY 2014 earnings statement. The company performed very well last year and even beat the Wall Street expectations game both on the top and bottom lines. Let's take a look to see how the company performed.

Revenue and profitability expanded

In 2014, O'Reilly Automotive saw its revenue, net income and free cash flow increase 9%, 16% and 49% respectively year-over-year. The success of any retailing venture comes from two major sources-getting customers to spend money and expansion. O'Reilly Automotive wins on both counts. O'Reilly Automotive saw its same store sales increase 6% year-over-year. In addition the company opened 200 stores in 2014 bringing the total store count to 4,366 vs. 4,166 at the end of 2013 and representing a 5% increase year-over-year.

In the highly competitive world of retailing keeping costs under control is a must. O'Reilly Automotive demonstrated that it could do this by growing revenue faster than expenses. In 2014, O'Reilly Automotive's operating margins came in at 16.5% vs. 13.7% in 2013. Moreover, its net profit margin came in at 10.8% in 2014 vs. 10.1% in 2013. O'Reilly Automotive's net income expansion helped increase free cash flow. Favorable changes in assets and liabilities, especially accounts payable, also contributed heavily to free cash flow expansion.

Slight improvement in balance sheet

O'Reilly Automotive saw a slight improvement in its balance sheet. At the end of 2014, O'Reilly Automotive harbored approximately $251 million in cash and equivalents amounting to 12.4% of stockholder's equity vs. 11.8% at the end of 2013. My personal preference is for a company to have cash amounting to 20% or more of stockholder's equity to get it through rough times.

O'Reilly Automotive's long-term debt at the end of 2014 remained even with the previous year. However, stockholder's equity expanded slightly due in part to net income expansion. As a result, long-term debt as a percentage of equity came in at 69% at the end of 2014 vs. 71% in 2013. This lies above my personal threshold of 50%. Long-term debt creates interest which chokes out profitability and cash flow. Operating income exceeded interest expense by a solid 24 times. The rule of thumb for safety lies at five times or more, meaning that O'Reilly rakes in more than enough profit to cover its interest expense.

Looking ahead

O'Reilly Automotive's management remains committed to what makes a retailer successful. According to the earnings announcement, they are predicting same store sales to increase 3% to 5% in 2015 and operating margins to register between 18.1% and 18.5% of sales. O'Reilly Automotive trades at a high P/E ratio of 28 vs. 18 for the S&P 500, according to Morningstar. On a forward basis this company trades at P/E ratio of 20 vs. 17 for the S&P 500. I am concerned that this company may correct big time if it loses the Wall Street expectations game. Also the company's long-term debt levels are a little high. Investors should wait for a better entry point before buying into the company.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Comments

[badeconomy]

I think you should read the credit suisse report on orly. it does contradict your analysis. Orly has best management and growth in the industry.

[William Bias]

Hi badeconomy,

On a fundamental basis the only concern I have is for the long-term debt levels. My main concern is that the stock price could correct in a major way if it has a disappointing earnings report.

Thanks for reading.

William