O'Reilly Automotive, Inc.

▲ Bull Case

• ◆AAP 700+ closures + comps sustain +7–8% through FY2027 + FCF recovery accelerates: DIFM account capture exceeds consensus estimates; CapEx normalizes to $800M by FY2027; FCF expands to $2.5B; buyback machine drives Core EPS to $4.10; P/E re-rates to 39x → $160 (+52% upside)
• ◆Fleet age structural tailwind extends peak cohort to FY2030: COVID production gap (2020–2021 chip shortage) creates durable deficit in 4–7 year old vehicles (peak repair cohort); peaks FY2028–2030 not FY2027–2028 as consensus models; enables +2–3% incremental annual comps for 3 additional years; EPS compounds to $5.00+ by FY2030 → $195 valuation at 39x P/E
• ◆International expansion (Mexico + Canada) unlocks 5–10% incremental upside: 60+ Mexico stores growing profitably; Canadian store expansion announced; by FY2028 international contributes 200+ stores and $1B+ revenue; represents entirely new growth vector consensus ignores, adding optionality to base case

▼ Bear Case

• ◆US recession + tariff headwinds + Q2–Q3 2026 comp deceleration materialize: Pull-forward thesis confirmed; consumer DIFM demand softens; tariffs on Chinese auto parts raise input costs; gross margin contracts -100bps; Core EPS declines to $2.90; P/E compression to 26x → $75 valuation (-29% downside)
• ◆CapEx overrun: DC build-out expansion extends into FY2027–2028: Distribution center construction encounters delays or cost overruns; CapEx stays elevated at $1.0–1.1B through FY2027 (not normalizing); FCF remains compressed; buyback capacity declines; EPS accretion disappears; multiple stays at 30x; stock trades $90–105 with no re-rating catalyst
• ◆Multiple compression 33x → 26x on normalized growth perception: Market re-rates from growth compounder to mature compounder as comparable sales normalize to consensus +3–4%; investors unwilling to pay premium P/E for low-single-digit organic growth; de-rating impact -21% independent of EPS cuts; stock declines to $82–88

“Core question: Is Q1 2026's +8.1% comp growth structural (driven by AAP closure tailwind + multi-year fleet age tailwind) or pulled-forward (driven by weather anomalies + tariff pre-buying of inventory)? Bull thesis: The 700+ AAP store closures create durable DIFM account wins that are difficult to reverse; fleet age at 13+ years is a secular trend spanning multiple years, not a one-quarter phenomenon; ORLY's DIFM penetration and commercial account infrastructure uniquely position it to capture this displacement; even if 2–3pts of Q1 were pulled-forward, the underlying structural run-rate of +5–6% represents meaningful acceleration from prior 2–4% trend. Bear thesis: Q1 included two one-time tailwinds—unusually cold winter driving heating/battery/wiper repairs, and distributor/shop tariff pre-buying ahead of announced increases—both of which reverse in Q2–Q3 2026; ORLY guided conservatively for Q2; if Q2 comps land at +3–4%, market will revise down FY2026 EPS and multiple will compress; AAP revenue per store capture is lower than bull estimates ($1–2M vs. $3–4M) due to intense competition from AZO and online channels. Our view: Reality likely in between. +5–6% underlying structural comps (not +8%) is the realistic FY2026 run-rate, beating the 2–4% prior average but below Q1's anomaly. Both AAP tailwind and fleet age are real, but magnitude of each remains uncertain. At 33x P/E, market prices the optimistic scenario. Risk/reward becomes attractive only below $88 (28x P/E).”

• ◆Q2 2026 earnings (July 2026): Binary catalyst on comp sales. >+6% validates structural demand thesis; <+4% confirms pull-forward and triggers EPS downrevisions. Sets tone for H2 2026 earnings revisions.
• ◆FY2026 CapEx guidance and FY2027 CapEx guidance (Q4 2026 / Feb 2027 earnings): Normalization signal below $900M FY2027 confirms FCF recovery timeline ($2.2–2.5B by FY2027); above $1.0B indicates DC expansion delays and pushes FCF recovery 1–2 years.
• ◆AAP closure pace updates (quarterly): Each 100 net store closures = ~$200–400M incremental revenue tailwind at $2–4M per captured account. Closure updates provide color on addressable market size and ORLY capture economics.
• ◆FY2026 EPS guidance raise (post-Q2 or Q3): Consensus models $3.15–3.25; guidance raise to $3.30–3.40 validates higher structural comps and successful AAP commercial account capture momentum.
• ◆US tariff escalation announcements and passthrough success (ongoing): Each tariff wave impacts ORLY's input costs; watch for pricing actions and gross margin held steady. Passthrough speed (6–12 months vs. slower) impacts EPS trajectory.

• ◆Comp deceleration to +2–3% (35% probability, moderate severity): Q1 pull-forward thesis validated; consecutive quarters of sub-+3% comps trigger TKS-1 (REDUCE); EPS impact ~$0.10–0.15 per share; multiple compression likely. Mitigant: non-discretionary nature of automotive maintenance provides recession resilience.
• ◆US recession 2026–2027 (25% probability, high severity): Even defensive auto parts retail softens in downturn; consumer DIFM demand declines; CapEx cuts accelerate; multiple compresses to 26x; bear case models -29% price impact. Trigger: two consecutive quarters of negative GDP or unemployment >5.5%.
• ◆Tariff escalation on Chinese auto parts (30% probability, moderate severity): ORLY imports 25–30% of parts from China/Asia; tariff exposure 25–145% depending on product category. Gross margin headwind 75–150bps in year one; ORLY has pricing power to pass through over 6–12 months but DIFM customers (mechanics) more price-sensitive than DIY consumers. Monitor quarterly gross margin trend.
• ◆CapEx overrun or DC build-out extends into FY2027–2028 (25% probability, moderate severity): Project delays, labor inflation, or design changes push CapEx normalization 1–2 years later; FCF recovery thesis delayed; buyback capacity reduced; EPS accretion deferred. Watch quarterly capex spending vs. guidance.
• ◆AZO captures disproportionate share of AAP displacement (25% probability, moderate severity): Both ORLY and AZO pursue displaced commercial accounts; competition for accounts is intense; unit economics of capture may be lower than bull case assumes; ORLY's DIFM advantage narrower than projected. Flag if ORLY commercial account growth <10% YoY.