Does This Valuation Of O’Reilly Automotive, Inc. (NASDAQ:ORLY) Imply Investors Are Overpaying?

Today, O’Reilly Automotive, Inc. (NASDAQ:ORLY) as an investment opportunity, by obtaining expected future cash flows and discounting them to today’s value. The discounted cash flow (DCF) model is the tool we apply to do this. Don’t let the jargon fool you. The math behind it is actually pretty simple.

It is worth pointing out that the DCF is not perfect for all situations, as companies may be assessed in different ways. If you want to learn a little more about intrinsic values, Simply the Wall St analysis model.

View the latest analysis from O’Reilly Automotive


We use what is called a two-step model. This simply means that he has two different periods in the company’s cash flow growth rate. Generally, the first stage is the high growth stage and the second stage is the low growth stage. First, you need to estimate your cash flow over the next 10 years. We use analyst estimates when available, but if these are not available, we extrapolate previous free cash flow (FCF) from previous estimates or reported values. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future, so the sum of these future cash flows is discounted to today’s value.

10-Year Free Cash Flow (FCF) Forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leverage FCF ($, million) US$2 billion $2.27 billion $2.27 billion $2.45 billion $2.57 billion $2.66 billion $2.74 billion $2.81 billion $2.88 billion $2.95 billion
growth rate source Analyst x 4 Analyst x 4 Analyst x 1 Analyst x 1 Analyst x 1 @ 3.52% @ 3.06% @ 2.74% @ 2.51% @ 2.35%
Present Value ($, Million) Discount @ 8.2% $1.8 million US$1.9 million $1.8 million $1.8 million $1.7 million $1.7 million $1.6 million $1.5 million $1.4 million $1.3 million

(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = $17 billion

Now we need to calculate the terminal value that accounts for all future cash flows after this decade. We use the Gordon-Growth formula to calculate the terminal value at a future annual growth rate equal to the 5-year average 2.0% of the 10-year Treasury yield. Discount the final cash flows to today’s value at a cost of equity of 8.2%.

Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = USD 2.9 billion × (1 + 2.0%) ÷ (8.2%– 2.0%) = USD 48 billion

Present Value of Terminal Value (PVTV)= television / (1 + r)Ten= US$48 billion ÷ ( 1 + 8.2%)Ten= $22 billion

The total value is the sum of the cash flows over the next 10 years plus the discounted terminal value, which is the total asset value. In this case, US$39 billion. The final step is to divide the stock value by the number of outstanding shares. Compared to the current stock price of $805, the company looks pretty expensive at the time of this writing. However, evaluation is an imprecise tool, like a telescope. Move a few degrees and you’ll end up in another galaxy. Remember this.

NasdaqGS:ORLY Discounted Cash Flow Jan 19, 2023

important premise

We point out that the most important inputs to discounted cash flows are the discount rate and, of course, the actual cash flows. Part of investing is also self-evaluating the company’s future performance. So try the calculations yourself and check your assumptions. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we see O’Reilly Automotive as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the liability. For this calculation we used 8.2% based on a leverage beta of 1.033. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are derived from industry average betas of globally comparable companies and are capped between 0.8 and 2.0. This is a reasonable range for a stable business.

O’Reilly Automotive’s SWOT Analysis


  • Revenue growth over the past year has outpaced the industry.

  • Debt is well covered by earnings and cash flow.


  • Revenue growth over the past year has been below the five-year average.

  • Expensive based on P/E ratio and estimated fair value.


  • Annual revenue is projected to increase over the next four years.


  • Total liabilities exceed total assets, increasing the risk of financial distress.

  • Annual revenue is projected to grow more slowly than the US market.

Next steps:

Importantly, ideally, DCF calculations are not the only analysis that scrutinizes a company. A DCF model cannot give foolproof estimates. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” If companies grow at different rates, or if their cost of capital or risk-free rates change abruptly, their outputs can look very different. Can you understand why the company is trading at a premium to intrinsic value?O’Reilly Automotive has summarized his three key factors to explore.

  1. riskNote: O’Reilly Automotive on display 3 Warning Signs in Investment Analysis one of which is a bit annoying…
  2. future earnings: How does ORLY’s growth rate compare to its peers and the wider market? Free analyst growth forecast chart.
  3. Other quality alternatives: Do you like all-rounders?expedition Our interactive list of high-quality stocks lets you know what else you might be missing!

PS. The Simply Wall St app provides discounted cash flow valuations for all NASDAQGS stocks daily.If you want to find calculations for other stocks search.

Valuation is complicated, but we’re here to help make it simple.

find out if O’Reilly Automotive You may be overestimated or underestimated by checking out our comprehensive analysis including: Fair value estimates, risks and warnings, dividends, insider trading and financial health.

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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …

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