These Analysts Remain Sidelined After O'Reilly's 'Solid' Quarter

O'Reilly Automotive Inc ORLY reported a beat-and-raise third quarter, which marks a turnaround after a rare second-quarter earnings miss. Two Street analysts remain unconvinced the stock should be bought by investors.

The Analysts

Morgan Stanley analyst Simeon Gutman maintains an Equal-Weight rating on O'Reilly with a price target lifted from $400 to $430.

Wedbush analyst Seth Basham maintains at Neutral, price target lifted from $380 to $425.

Best Quarter In A While

O'Reilly's report marks the company's best quarter in "some time" as comps of 5% were the highest seen in more than three years, Gutman wrote in a note. Gross margin also expanded by a "healthy" 35 basis points and expenses levered for the first time in 10 quarters.

Gutman said O'Reilly was able to take advantage of two factors, including favorable weather trends and supportive do-it-yourself trend.

Looking forward, fourth-quarter guidance look to be conservative and beatable. Vomps of 4.5% (above guidance of 3% to 5%) implies a deceleration on multi-year stacks while the fourth quarter typically boasts higher gross margins versus the third quarter.

Beyond the fourth quarter, Gutman thinks O'Reilly needs to sustain a comp of more than 4% next year which would be a required metric for investors to turn bullish on the stock.

O'Reilly's "solid" third quarter is highlighted by an industry-leading 5% comp gain and a top- and bottom-line beat, Basham wrote in a note. However, management didn't increase its 2019 sales, comps or margin guidance but does shift expectations to the high-end of management's guidance range.

Nevertheless, Basham said investors should view the results positively and the recent momentum but takes a back seat to the stock's "elevated" valuation at 21 times 2020 estimated EPS for a company growing earnings at a mid-teens rate.

Price Action

Shares of O'Reilly Automotive were trading higher by 7.4% Thursday and hit a new 52-week high of $442.15.

Photo credit: Michael Barera, from Wikimedia Commons