Episode Details

O'Reilly Automotive, Inc. (ORLY) Q2 2026 — Reported after the close on July 29 (Q2 2026, the three months ended June 30, 2026). Sales $4,892.0M, up 8.1% from $4,525.1M. Comparable store sales +6.0%, on top of +4.1% a year ago. Diluted EPS $0.86 against $0.78, up 10.3%, and against a Street number near $0.86 — in line. Management RAISED full-year comparable sales guidance to 4.0-6.0% from 3.0-5.0% and EPS guidance to $3.20-$3.30. The stock fell from $90.63 to $87.36 the next session, down 3.6%, and closed at $89.76 on August 3. The number nobody put on air: the incremental operating margin was 19.4%. Sales rose $367.0M, gross profit rose $190.2M, SG&A rose $118.9M — so operating income rose just $71.3M. Every new dollar of sales earned 19.4 cents of operating income against a company average of 20.2. That is why the strongest comparable store sales in years arrived with the operating margin FALLING six basis points, from 20.21% to 20.15%, gross margin flat at 51.4% and SG&A DELEVERAGING nine basis points. Net income grew 7.0%. Diluted EPS grew 10.3%. The entire gap is a 3.4% smaller share count, bought with $1.19B more debt. THE CALL: HOLD (4/5, A SUPERB BUSINESS WHOSE EPS ENGINE IS NOW A THIRD BUYBACK.) — base-case value ~$75.0 vs ~$89.76 today. KEY METRICS: - CALL: HOLD 4/5 — fair value ~$75 vs $89.76 (about 16% BELOW) and 30.4% below the Street's $107.77. OWNER EARNINGS = trailing net income $2,650.4M plus D&A $537.7M less roughly $775M of maintenance capital (capex is guided at $1.30-1.40B, of which about $575M opens the 225-235 new stores) = ~$2,413M, a 3.3% yield on a ~$72.6B market value. STEP 1, a 3x3 DCF grid across owner-earnings bases of $2.25B / $2.41B / $2.65B and bear/base/bull growth: $46-$54, $62-$73, $84-$98. Exactly TWO of the nine cells clear $89.76 and both need the bull row — 8% growth for five years at a 7.75% discount rate. Probability-weighted the grid gives $68. STEP 2, a multiple grid on 2027E EPS of $3.58 at 20x/22x/24x/26x, weighted, gives $82. Blend to ~$75. REVERSE DCF: today's price needs 9.3% compound owner-earnings growth for a decade; the Street's $107.77 needs 11.6%. - THE UNDER-COVERED ANGLE — A 6% COMP WITH NEGATIVE OPERATING LEVERAGE. Sales +$367.0M. Gross profit +$190.2M, a 51.8% flow-through. SG&A +$118.9M — 32.4% of the incremental sales against a 31.3% average. Operating income +$71.3M, an incremental margin of 19.4% against the 20.2% the company already earns. The marginal dollar is LESS profitable than the average dollar. Result: gross margin 51.45% vs 51.41%, SG&A 31.30% vs 31.21%, operating margin 20.15% vs 20.21% — DOWN six basis points on the best comp in years. - PROFESSIONAL PASSED DIY, AND THAT IS WHY THE MARGIN IS FLAT: sales to professional service providers rose 12.5% to $2,469.6M while DIY rose 4.9% to $2,336.9M. Professional is now 50.5% of total revenue against 48.5% a year ago — a year ago DIY was the bigger half. The gap went from DIY ahead by $32.7M to professional ahead by $132.7M. DIFM is the lower-margin half (wholesale pricing, volume, negotiation), so the fastest-growing half is the thinnest one. The lazy 'ageing car parc guarantees DIY comps' thesis is being monetised through the SHOP, not the driveway — and the shop pays less. First-half professional +13.5%, DIY +5.8%. - THE BUYBACK IS DEBT-FUNDED AND THE SUPPLIER FLOAT IS RUNNING DOWN: H1 free cash flow $1,477.8M, H1 repurchases $2,433.0M — 165% of it, funded with $651.9M of net commercial paper and $847.4M of new notes against $500.0M repaid. Long-term debt $5,823.7M to $7,014.5M; interest expense +21.9% to $69.9M. Shareholders' equity went from a $763.4M deficit at December 31 to a $1,835.7M deficit — $1,072.4M more negative in six months. Adjusted debt/EBITDAR 2.06x to 2.17x. And accounts payable to inventory fell from 127.0% to 123.7%: the float SHRANK from $1,459.1M to $1,413.1M while inventory grew $572.3M. - THE RAISE GUIDES TO A SLOWDOWN: comps went to 4.0-6.0% from 3.0-5.0%, revenue to $18.9-19.2B from