Enough Is Enough: O'Reilly Auto Uncertainty Leads To Downgrade

After reporting weaker-than-expected second-quarter earnings (metrics available on Benzinga Pro) results Wednesday, O’Reilly Automotive, Inc. ORLY shares fell nearly 20 percent. This move led Credit Suisse analyst Seth Sigman to downgrade O’Reilly Automotive to Neutral and lower his price target from $262 to $195.

“While we don’t think this model is broken and we continue to see value in this best-in-class player, it will be difficult to prove that until sales stabilize, estimates get fully reset, or absent some other strategic catalyst," Sigman said. "Patience is needed.”

What Is Driving The Uncertainty?

Sigman highlighted while Wednesday’s move might be an overreaction, it is clear the market is worried about several factors in O’Reilly’s industry. Specifically, he noted deceleration in O'Reilly's business after April, uncertainty from key drivers and vulnerable margins.

Could More Favorable Weather Trends Benefit O'Reilly Shares?

“While we assume lower baseline growth for the industry going forward after several above average years, we do see optionality from more favorable weather in 2H after two unseasonably warm winters," Sigman said. "That alone won't support the stock, but could provide a multi quarter driver to navigate this lower demand period.”

Overall, it seems O’Reilly's management team does not have a clear explanation for the porous Q2 earnings results, and Sigman sees few reasons to expect improvement in the near future.

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