Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how O’Reilly Automotive fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): O’Reilly Automotive, Inc. (O’Reilly) is a specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories in the United States, selling its products to both do-it-yourself (DIY) customers and professional service providers. As of December 31, 2012, O’Reilly operated 3,976 stores in 42 states. The Company’s stores product line includes products, such as new and remanufactured automotive hard parts, such as alternators, starters, fuel pumps, water pumps, brake system components, batteries, belts, hoses, temperature control, chassis parts and engine parts; maintenance items, such as oil, antifreeze, fluids, filters, wiper blades, lighting, engine additives and appearance products, and accessories, such as floor mats, seat covers and truck accessories. Its stores offer a number of services and programs to its customers, such as used oil and battery recycling; battery diagnostic testing; professional paint shop mixing and related materials, and machine shops.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $141.93 |
| MG Value | $175.59 |
| MG Opinion | Fairly Valued |
| Value Based on 3% Growth | $66.13 |
| Value Based on 0% Growth | $38.77 |
| Market Implied Growth Rate | 11.31% |
| Net Current Asset Value (NCAV) | -$11.95 |
| PEmg | 31.12 |
| Current Ratio | 1.17 |
| PB Ratio | 7.65 |
Balance Sheet – 12/31/2013
| Current Assets | $2,835,200,000 |
| Current Liabilities | $2,423,000,000 |
| Total Debt | $1,396,100,000 |
| Total Assets | $6,067,200,000 |
| Intangible Assets | $756,200,000 |
| Total Liabilities | $4,100,900,000 |
| Outstanding Shares | 105,940,000 |
Earnings Per Share
| 2013 | $6.03 |
| 2012 | $4.75 |
| 2011 | $3.71 |
| 2010 | $2.95 |
| 2009 | $2.23 |
| 2008 | $1.48 |
| 2007 | $1.67 |
| 2006 | $1.55 |
| 2005 | $1.45 |
| 2004 | $1.06 |
Earnings Per Share – ModernGraham
| 2013 | $4.56 |
| 2012 | $3.56 |
| 2011 | $2.78 |
| 2010 | $2.20 |
| 2009 | $1.78 |
| 2008 | $1.51 |
Conclusion:
O’Reilly Automotive is not suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor’s issues with the company are the low current ratio, the lack of dividend payments, and the high PEmg and PB ratios. Â The Enterprising Investor is concerned with the high level of debt relative to the current assets. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham Stocks & Screens as well as 5 Low PEmg Companies for the Defensive Investor. Â From a valuation perspective, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.78 in 2009 to $4.56 for 2013. Â This very impressive level of demonstrated growth supports the market’s implied estimate of 11.31% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on O’Reilly Automotive (ORLY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in O’Reilly Automotive (ORLY) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
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