O’Reilly Automotive Hits A Pothole

Analysts Buy The Dip In O’Reilly Automotive

Shares of O’Reilly Automotive (NASDAQ: ORLY) tanked after the company released its Q1 earnings but some are welcoming the news. Analysts Michael Lasser of UBS urged the company’s client to use the pullback as a buying opportunity due to the strength of industry trends. The stock is falling because O’Reilly Automotive’s results missed the consensus mark, the takeaway however is that seasonally expected volatility cut into the results and the guidance remains unchanged. 

“We believe that recovering mobility and limited new car sales will support industry trends,” Lasser wrote. “As such, we would take advantage of a pullback.”

Lasser and UBS have a Buy rating on the stock with a target of $790 compared to the weak Buy and $730 target indicated by the Marktbeat.com consensus. UBS is the only sell-sider to come out with commentary so far but the trend is up. There have been a series of upgrades and price target increases since the first of the year.

O’Reilly Automotive Misses On The Top And Bottom Lines 

O’Reilly Automotive had a good quarter and produced growth, just not as much as the analysts were expecting but the margin of error is slim. The company reported $3.3 billion in consolidated revenue for a gain of 6.8% but missed the consensus by 60 basis points. The miss is not a good thing to see but not as important as growth in general and the fact comps are up 29.6% in the two-year stack. 

“Historically, our first quarter can be volatile, as we see weather impacts from winter conditions early in the quarter and the timing of the onset of spring at the end. This year was no exception, and we saw choppiness in our business that coincided with inclement weather at the beginning of our quarter and the slow start to spring, along with other macroeconomic pressures,” says Greg Johnson, O’Reilly Automotive CEO. 

The earnings news is equally mixed with gross and operating margins falling versus last year.  The gross margin contracted by 130 basis points and the operating margin by 210 and both more than expected. The declines are due to sales leverage and inflation as well as internal efforts to boost growth and should be recovered in the next few quarters. The bad news in regards to earnings is that GAAP earnings of $7.17 fell short by $0.34, the good news is that earnings grew 2% YOY and are up 34% in the two-year stack. As for guidance, the revenue and margin guidance was reaffirmed at the previous levels. 

The Technical Outlook: Someone Is Buying The Dip In O’Reilly Automotive 

Price action in O’Reilly Automotive fell about 10% in the wake of the earnings release and hit the lowest levels since February. The move was met by buyers, however, and price action rebounded strongly from the low. This action is most likely supported by repurchase activity as well because O’Reilly is an active share repurchaser and has $1.2 billion in funds available for purchases. In the near-term, price action may retest the recent low but we would expect to see it bounce again. Longer-term, price action may move sideways within the range of $620 to $660 until the next earnings report is released.