O’Reilly Automotive NASDAQ: ORLY, one of the leading automotive aftermarket parts suppliers, is what many would call a recession-proof company.
When the economy is strong and people are buying new vehicles, the number of automobiles on the road increases, giving ORLY a larger customer base. But in a weak economy, people try to milk their cars for every mile; O’Reilly benefits as these old cars need more repairs.
O’Reilly’s recession-proof business is confirmed by the numbers as 2019 was the company’s 27th consecutive year of same-store sales growth.
But 2020 has been a different beast due to the coronavirus pandemic; stay-at-home orders are taking people off the road. In the last two weeks of March, miles driven were down by more than 40% in the US. Miles driven is probably the single best metric to assess O’Reilly’s business strength. It’s usually very stable year-to-year, but we are in unprecedented times.
The virus put a big dent in O’Reilly’s business, with comps in the mid-March to mid-April period down 13%. With part of that effect manifesting in Q1, it was partially responsible for a 1.9% decline in comp-sales compared to Q1 2019.
So is the pandemic just a blip on the radar for O’Reilly or will it have a lasting impact?
O’Reilly Automotive Good News & Bad News
The mid-March to mid-April period probably represents the worst of the pandemic for O’Reilly. At the onset of the pandemic, many people stayed home out of an abundance of caution. While the virus is still a major factor across the US, many people have adjusted to the new normal and started driving more again.
According to Urgently, traffic returned to pre-pandemic levels the week of June 7. There are a couple of things impacting traffic trends in 2020, one working to increase traffic and the other decreasing miles driven.
On the one hand, with many people apprehensive about flying, driving to vacation destinations is becoming more common.
On the other hand, the work-from-home movement feels like it is here to stay. That would decrease miles driven if fewer people are driving to the office every day in the long run.
It’s hard to quantify these effects and project their long-term impact – even moreso because they are new trends. But the fact that traffic has already returned to pre-pandemic levels should provide optimism that the work-from-home movement won’t put a major dent in miles driven.
While O’Reilly’s long-term outlook remains strong, it is dealing with some near-term struggles due to its business model.
High Fixed Costs
Some companies have managed to shift their businesses to the internet since the onset of the pandemic, offsetting some (or all) of the decline in brick-and-mortar sales.
But the auto repair business is not conducive to the online world, and there is only so much that O’Reilly can do.
ORLY still has to staff its stores for the hours they are open, meaning that as comps decrease, SG&A becomes a larger percentage of sales.
However, with an operating margin of over 17%, ORLY’s margins can withstand some pressure. And with $1.1 billion of total liquidity in cash and access to a $1.2 billion revolving credit facility, the company should be able to handle any short-term obstacles.
The company (wisely) suspended its share buyback program in March because of the pandemic, but it has bought back a high number of shares over the last five years, reducing diluted shares outstanding by more than 26%. Look for ORLY to resume its share buybacks after the pandemic ends.
ORLY is currently trading at around 25.5x projected 2020 earnings and 22x projected 2021 earnings. The company seems well-positioned to prosper over the next few years, and a multiple in the mid-20s is very reasonable for a company with its growth profile.
O’Reilly Automotive Where Should You Get In?
O’Reilly just broke out of a two-month base between around $400 and $435. Volume was higher than last week’s average, but lower than the long-term average. Shares also didn’t move much on the day of the breakout. It was a tepid breakout – all things considered. You’d ideally see a breakout with more conviction – high volume, moving 3-5%, and closing near the day’s highs.
On the plus side, the 50-day moving average crossed over the 200-day moving average around a month ago. But the breakout moved shares into overbought territory on the RSI, albeit just above 70.
The next resistance is just a few points higher, at the all-time highs of $454.31 made in November 2019. I think it’s best to look for a 5-10 session consolidation between around $445 and $455, followed by a decisive breakout above $455. That type of action would give reason to believe that ORLY is ready for another leg-up.
The Final Word on O’Reilly Automotive
O’Reilly Automotive is a strong company dealing with temporary setbacks from the pandemic. But there is reason to believe that March and April were the worst of it; business should improve over the course of the year. Based on traffic trends, Q2 should be a lot better than Q1.
You could look to get in right now, but I would wait for more convincing price action, especially with additional resistance just ahead. Paying an extra 3-5% would be worth it with the confirmation it would provide.
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