We have reiterated our Neutral recommendation on the stock of O’Reilly Automotive Inc. (ORLY) for more than six months. The company continues to benefit from its dual-market strategy and strong distribution network. Further, the CSK acquisition is expected to boost the company’s earnings and savings, and will help it outgrow competitors.
However, O’Reilly’s cash is locked in huge inventories. In addition, its store locations are highly concentrated, which makes it vulnerable to several economic and natural problems in those areas.
In the second quarter of the year, O’Reilly recorded a 17% increase in profit to $133.8 million or 96 cents per share from $114.6 million or 81 cents per share during the same quarter of 2010. The profit was in line with the Zacks Consensus Estimate.
The second quarter of 2010 results excluded a charge related to the investigation of CSK Auto Corporation (acquired by the company three years ago) by the U.S. Department of Justice.
The increase in profit was attributable to higher sales and cost reduction measures, reflected by lower selling, general and administrative (SG&A) expenses compared with the 2010 quarter.
Sales in the quarter grew 7% to $1.48 billion from $1.38 billion a year ago. Comparable store sales increased 4.4% versus 7.9% in the second quarter of 2010
During the quarter, O’Reilly opened 44 new stores, which brings its total store openings to 99 for the first half of 2011. With this, the company is on track to reach its goal of 170 (net) store openings in 2011.
For the third quarter of the year, O’Reilly has projected adjusted earnings per share between 98 cents to $1.02 and consolidated comparable store sales to increase in the range of 2% to 4%.
For full year 2011, the company anticipates adjusted earnings per share in the range of $3.53-$3.63 and consolidated comparable store sales to increase by 3% to 6%. This is higher than the previous guidance of earnings per share of between $3.49 and $3.59.
The company reiterated its revenue guidance of $5.7 billion to $5.8 billion, comparable store sales increase guidance of 3%-6%, operating margin guidance of 14.2%-14.6% and gross margin guidance of 48.4%-48.8%.
It also expects to incur capital expenditures of $290 million to $320 million and generate free cash flow of $425 million to $475 million for the year.
Meanwhile, O’Reilly’s competitor, Genuine Parts Company (GPC) posted a 22% rise in profit to $151.8 million in the second quarter from $124.5 million in the year-ago quarter. Earnings per share were 96 cents, up 23% from 78 cents per share delivered in the comparable quarter last year. Quarterly EPS also surpassed the Zacks Consensus Estimate by 7 cents.
