O’Reilly Earnings: Strong Performance Continues, but Shares Are Priced for Perfection

We expect little change to our fair value estimate of $680 per share for narrow-moat O’Reilly ORLY after it announced second-quarter results highlighted by continued strong performance. Same-store sales were up 9%, slightly slower than the first quarter’s 11% growth but still much faster than the roughly 4% in the year-ago quarter. As was the case in the first quarter, the company saw double-digit growth in the professional segment, which we believe reflects its superior distribution apparatus and the industry’s insulation from macroeconomic volatility. Shares were down about 4% after the earnings release, which we think reflects the sky-high expectations the market has placed on O’Reilly. Thus, despite our view that it’s the best-positioned national retailer with its robust dual-market approach, shares are priced for perfection and look overvalued to us.

Management once again updated 2023 guidance, now calling for $37.05 to $37.55 in adjusted diluted EPS (previously $36.50 to $37.00), though we still believe the range could prove conservative, as our $37.76 estimate remains above the new range.

Additionally, the company announced that CEO Greg Johnson will retire on Jan. 31, 2024. Current co-president Brad Beckham will succeed Johnson, with the other co-president, Brent Kirby, becoming the sole president of O’Reilly. We think Beckham is a logical choice, as he’s been with the company since 1996 and worked his way up the ranks. His intimate familiarity with O’Reilly should be able to help it maintain its industry-leading quality. As such, we are maintaining our Exemplary capital allocation rating.

The company repurchased another $680 million of shares during the quarter. We don’t like this use of cash given we think shares are overvalued, but the amount repurchased has not impeded its ability to invest in expansion and isn’t enough to affect our capital allocation rating.