Monday, FBR Capital Markets downgraded O'Reilly Automotive Inc. (ORLY) shares to Underperform from Market Perform and lowered its price target to $36.50 from $42. However, the brokerage raised its 2009 EPS estimate to $2.13 from $1.94.
Analyst Stephen Chick said that his new $2.13 earnings estimate for 2009 is in line with the high end of EPS guidance of $2.09 to $2.13. Yet, the analyst thinks that the equity market has become accustomed to significant EPS beats here, and these look less likely as ORLY starts to cycle the first full quarter of its 2008 acquisition of CSK auto (roughly 40% of pro forma sales) in fourth quarter of 2009.
The analyst noted that the latest second quarter of 2009 showed a dramatic expansion of LIFO gross margins (320 bps), while operating cash flows grew at a much lower rate than reported earnings. Same-store sales trends have been stellar (7% to 8% for the "core" O'Reilly stores), and these trends are slated to see their peak this next quarter, third quarter of 2009, based on the analyst's model.
Converted, acquired CSK store same-store sales, in the meantime, have been lower than the analyst has expected (-3.4% for this past second quarter of 2009 for the Checker branded stores, currently "running positive" so far in third quarter of 2009). The analyst assigns a fair value price target to ORLY of $36.50, which is 10% below recent levels.
The analyst said that this reflects an 8x 2009 EBITDA valuation (7.9x EBITDAR, with leases), a 17.2x P/E, and a 20% premium to the after-market auto group average, excluding ORLY (39% premium to AutoZone Inc.'s (AZO) current valuation, which is ORLY's 10-year average premium to AZO). The analyst thinks it is unlikely ORLY would outperform the S&P 500 from here, and it is more likely to underperform, should trends slow over the next year.
Currently, ORLY is down $1.16 or 2.85% and trading at $39.50.
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