- The O'Reilly Automotive, Inc. Q4 report showed ongoing strength though somewhat light guidance.
- The trends in EPS are impressive, growing 23% compounded over three years.
- The strong comparable same-store sales growth along with a hefty buyback drive big earnings.
- We need to watch margins, and new money needs to wait.
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We have been bullish on O'Reilly Automotive, Inc. (NASDAQ:ORLY) and this remains a name we really like. ORLY stock has been frothy since November, though has pulled back from highs of $870. We like buying shares in the $770-$790 range. We think the market as whole will pull back heavily and have been encouraging members to take profit on rips in the market.
Long term, ORLY stock is a winner. They have really focused on margins and have boosted shareholder returns through aggressive share repurchases. We believe the stock is heading for $1,000 by year end, but should pull back with the market near-term. We like the growth here and we like the fact that the car repair and maintenance business is relatively recession-resistant. We still stand by buying under $800, as shares are a little stretched valuation-wise but the growth is strong. The company continues with its solid buyback, which ensures additional earnings per share growth over time, on top of the organic growth. The company just put out results, and the company continues to be a strong performer.
O'Reilly's Q4 performance
O'Reilly just reported its Q4 and performance is strong. This quarter was strong yet again, and performance looks set to continue to be strong long term. We want to remind you that there will be ups and downs in share prices, and you should be buying big drops as we see this stock going higher longer-term.
The company has very respectable gross margins and great sales growth, which helped offset guidance that was positive though less so than in years past. The company once again exceed sales expectations overall and exceeded same-store sales expectations. In Q4 2022, O'Reilly reported sales of $3.64 billion, which was a 10.7% year-over-year increase from $3.29 billion a year ago, and was a decent beat versus consensus analyst estimates by $140 million. Sales continue to reliably grow each year, and we project this growth to continue even in an economic slowdown, and one could argue we are slowing down, but that did not stop the company from reporting a record Q4.
As our readers know, comparable sales are a key measure for a retail company like this. The fact is that comparable sales improve year after year for the company, other than the pandemic year 2020. We expected at least 6.5-7.5% positive comps based on historical metrics. The comparable sales came in crushing our expectations, hitting 9.0%. When we look to the past three years combined, the three-year stacked comparable sales growth is an impressive 34.7%. For 2023, we see at 3.5-5.5% comps as likely, but management guided 4-6%.
Further boosting the top line has been a calculated approach to expansion of the business, as well and strategically opening new stores for added growth in key markets. They opened another net 169 shops in the last year and currently operate 5,971 stores in 47 states. The company also operates 42 stores in Mexico. Continued sales growth is bullish as the company is opening new stores strategically while still projecting 5% comps at the midpoint. Looking ahead to 2023, we still expect another 175+ stores to be opened as well.
The company has long enjoyed strong margin power, but margins have ticked lower in recent quarters. While it is not impacting the amazing growth in earnings, it is something to watch, but margins remain impressive. The company has really worked to optimize costs and boost margin potential. Inflation has both helped and harmed margins, as input costs have risen, but so as the average ticket price per item available for sale. Gross margins came in at 50.9%, down from 52.7% a year ago. This is still strong and led to a 7% increase in gross profit.
Operating income also increased 1% to $682 million, or 18.7% of sales, from $676 million, or 20.5% of sales. The big gains in revenue and still strong operating margin expansion helped EPS grow, but we need to be mindful that margins have been crimped slightly. Still, this is a mild weakness, at best.
The fact is that full-year 2022 comps grew to 6.4%, with over 50% margins, resulting in a full-year diluted earnings per share increase of 8% to $33.44. That translates to annual growth rate of 23% over the last three years. For Q4, we saw EPS rise 10% to $8.37 from $7.64 per share a year ago. This result also beat consensus by $0.61. Other than the gross and operation margins narrowing slightly, it was once again a strong result, and the momentum should continue moving forward.
While we would love to see margins in the mid-50% range, management guided for 50.8% to 51.3% margins. Folks, this is still a fine result, though is a bit lighter than the 51.0%-52.0% we initially pegged for 2023. Sales will grow with comps projected to increase 5% at the mid-point, with revenues of $15.2 to $15.5 billion, a touch under the $15.35-$15.80 billion we were targeting. Keep in mind, there will be new stores opening, also helping revenues, and our 175+ target is conservative relative to the 180-190 management is guiding for 2023.
The thing we love about this company is the shareholder boost from the amazing buyback program. O'Reilly invests a ton of cash into the buyback program. This has worked, as you can see with the trends in EPS over the last few years, growing 23% compounded over three years.
O'Reilly invested another $421 million into new purchases at an average price of $786.19 per share. This helped drive EPS to $8.37. Given expectations for margins around 51% and sales around $15.35 billion for the year expected, assuming a commensurate level of repurchase activity (management has bought back 0.4 million shares in Q1 already) we see 2023 EPS of $35.50-$37.59. Management was more narrow and has targeted $35.75 to $36,25, but we have to tell you this company is a serial beat and raise type company.
O'Reilly Automotive, Inc is a great long-term investment. We remain bullish long-term on O'Reilly stock, but we strongly recommend waiting for a sizable pull back before committing new money. Sure, in a few years, your O'Reilly Automotive, Inc. investment is very likely to be higher, but we want you to also be tactical.
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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ORLY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.