O’Reilly Automotive and Kirby Corporation

Summary of the May selection

The most attractive stocks (+ 1.4%) outperformed the S&P 500 (+ 0.8%) from May 5, 2021 to June 1, 2021 by 0.6%. The best-performing large-cap stock gained 12% and the best-performing small-cap stock gained 30%. Overall, 21 of the 40 most attractive stocks outperformed the S&P 500.

The Most Dangerous Stocks (+ 3.9%) as a short portfolio lagged the S&P 500 (+ 0.8%) by 3.1% from May 5, 2021 to June 1, 2021. The best-performing large-cap stock fell 3% and the best-performing small-cap stock fell 8%. Overall, 10 of the 26 most dangerous stocks outperformed the S&P 500 as shorts.

The most attractive / dangerous model portfolios performed 1.3% worse than equally weighted long / short portfolios.

13 new stocks make it onto the Most Attractive List this month and 13 new stocks make it onto the Most Dangerous List this month. June’s most attractive and dangerous stocks were made available to members on June 3, 2021.

My most attractive stocks have high and rising returns on invested capital (ROIC) and low price-to-book ratios. Most dangerous stocks have misleading gains and long periods of growth implied by their market valuations.

June’s Hottest Equity Feature: O’Reilly Automotive, Inc. (ORLY)

O’Reilly Automotive, Inc. is the Most Attractive Stock Model Portfolio announced in June.

O’Reilly has grown sales 8% annually and net operating profit after tax (NOPAT) 15% annually for the past decade. Longer term, O’Reilly has increased NOPAT by 19% annually for the past 20 years.

The company’s NOPAT margin rose from 9% in 2010 to 18% in the last twelve months (TTM), while invested capital revenues increased from 1.1 to 1.9 over the same period. Increasing margins and invested capital improve O’Reilly’s ROIC from 10% in 2010 to 33% TTM.

Over the past five years, O’Reilly had a cumulative free cash flow (FCF) of $ 6.5 billion (18% of market cap). O’Reilly has raised $ 3 billion in FCF through TTM.

Figure 1: Sales & NOPAT since 2010

ORLY is undervalued

At a current price of USD 528 / share, ORLY has a price-performance ratio (PEBV) of 0.8. This ratio means that the market expects O’Reilly’s NOPAT to fall 20% on a permanent basis. This expectation seems too pessimistic for a company that has increased its NOPAT value by 14% annually over the past five years.

Even if O’Reilly’s NOPAT margin drops to 16% (which is the three-year average compared to 20% TTM) and the company grows sales only 3% annually for the next decade, its stock is now $ 697 / Share worth – an increase of 32%. Look at the math behind this reverse DCF scenario. Should O’Reilly increase earnings in line with historical levels, the stock has even more upside potential.

Critical details found in My Firm’s financial records Robo Analyst Technology

Below are details of the adjustments I’m making in O’Reilly’s 10-K and 10-Q based on Robo-Analyst’s findings:

Income Statement: I made $ 307 million adjustments with a net effect of $ 194 million in non-operating expenses (2% of sales). View any adjustments to O’Reilly’s income statement here.

Balance Sheet: I made $ 528 million adjustments to calculate invested capital with a net decrease of $ 224 million. One of the most notable adjustments was $ 102 million in operating leases. This adjustment corresponded to 2% of the reported net assets. You can view any adjustments to O’Reilly’s balance sheet here.

Valuation: I made $ 7.3 billion of adjustments, with a net impact of a $ 6.6 billion decrease in shareholder value. Aside from total debt, which includes the operating leases mentioned above, one of the most notable adjustments to shareholder value was a $ 367 million excess in cash. This adjustment is equal to 1% of O’Reilly’s market capitalization. See all of O’Reilly’s review adjustments here.

Feature of Most Dangerous Stocks: Kirby Corporation

KEX

Kirby Corporation (KEX) is the Most Dangerous Stocks Model Portfolio, announced in June.

Kirby Corporation’s economic profit, the company’s true cash flow, fell from $ 94 million in 2014 to $ -276 million versus the TTM. The company’s NOPAT margin fell from 14% in 2014 to 4% TTM, while the invested capital turnover fell from 0.7 to 0.3 TTM in the same period. Falling NOPAT margins and invested capital increase Kirby Corporation’s ROIC from 10% in 2014 to 1% TTM.

Figure 2: Economic result since 2014

KEX offers low risk / reward

Despite its poor fundamentals, the KEX is still valued for significant earnings growth and is overvalued.

To justify the current price of $ 66 / share, Kirby Corporation needs to improve its NOPAT margin to 7% (three-year average versus 4% TTM) and increase NOPAT value by 13% annually for the next decade. Look at the math behind this reverse DCF scenario. Given that the Kirby Corporation’s decline has declined 10% annually from 2014 to 2019 before the COVID-19 pandemic, I think these expectations are overly optimistic.

Even if Kirby Corporation improves its NOPAT margin to 7% and increases the NOPAT margin 8% annually for the next decade, the stock is only worth $ 30 / share today, a 55% decrease from its current share price is equivalent to. Look at the math behind this reverse DCF scenario. This scenario assumes that Kirby Corporation will increase sales by 6% (corresponding to the consensual sales estimate of 6% by 2022) annually over the next 10 years. Should Kirby Corporation’s sales grow slower, the stock has even more disadvantages.

Each of these scenarios also assumes that Kirby Corporation will be able to increase sales, NOPAT and FCF without increasing working capital or fixed assets. This assumption is unlikely, but it allows us to create best-case scenarios that show how high the expectations embedded in the current valuation are.

Critical details found in financial records through my company’s robo-analyst technology

Below are details of the adjustments I’m making based on Robo-Analyst’s findings in 10-K and 10-Q from Kirby Corporation:

Income Statement: I made $ 850 million adjustments with a net effect of $ 393 million in non-operating expenses (3% of sales). Here you can view all adjustments to the Kirby Corporation Income Statement.

Balance Sheet: I made $ 792 million adjustments to calculate invested capital with a net increase of $ 620 million. One of the biggest adjustments was $ 626 million in impairment losses on assets. This adjustment corresponded to 11% of the reported net assets. Here you can see all adjustments to the Kirby Corporation balance sheet.

Valuation: I’ve made $ 2.3 billion of adjustments with the net effect of dropping shareholder value by $ 2.3 billion. There were no adjustments that increased shareholder value. Aside from total debt, the most notable adjustment to shareholder value was $ 607 million in net deferred tax liabilities. This adjustment is equivalent to 15% of Kirby Corporation’s market capitalization. All adjustments to the Kirby Corporation rating can be found here.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler do not receive compensation for writing about any particular stock, style, or topic.