Sterne Agee Initiates Coverage On O'Reilly Automotive

Sterne Agee initiated coverage Thursday on O'Reilly Automotive Inc (NASDAQ: ORLY) with a Neutral rating.

According to analysts Ali Faghri and Michael Ward, “The secular shift to the faster growing and larger [Do-It-For-Me (DIFM)] segment favors companies with a strong commercial focus.”

“ORLY has consistently been a leader in the DIFM segment with their industry leading distribution infrastructure and continues to make capital investments to expand its network of distribution centers. O’Reilly employs a tiered distribution model, which allows for higher parts availability, while lowering inventory costs and also allows the company to target both populated and more remote areas,” according to Faghri.

Faghri highlighted that “ORLY has been implementing several initiatives to help drive share gains in the fragmented commercial market. The First Call program focuses on commercial customers and provides them with technical and business training, helping to strengthen customer relationships. Year to date ORLY has trained over 14,000 technicians as part of the program. ORLY also has the advantage of a team of over 600 sales representatives and store managers that specifically target commercial customers.”

The report noted that “ORLY has historically traded at a forward P/E multiple of 17.8x. Relative to our 2015 EPS estimate, ORLY is trading at 21.5x.

“On an EV/EBITDA basis, ORLY is currently trading at 12.1x our 2015 EBITDA estimate, above its historical average of 9.3x."

Faghri concluded, “ORLY is one of the better positioned names in the group to take advantage of secular growth trends but the valuation is holding us back from recommending the stock at this time. We would look for a pullback in shares.”

O'Reilly Automotive recently traded at $178.98, down 1.46 percent.