This is a good summary. @CT: Do you have a more deep dive explanation to your Valuation Model (Exhibit XXII)? Or a sample / short description to understand the last part for the simplified valuation? Thanks for this!
Hi! Thanks for the question; you can make a very complicated valuation model but here I stick to two components: sum of all free cash flows over FY25 - FY34 plus exit market cap (run-rate NOPAT times multiple) - starting net debt beginning FY25. Then comparing that to the current market (tenth root).
Cool, i prefer simple models too, just trying to understand your line of thought here. Why is the exit market cap based on nopat vs cf? And, I also very much like your forward looking roiic concept, that‘s very clever. How did you get there e.g. 20.7% in fy25? Thanks tons.
NOPAT because I want to value the company in perpetuity assuming it’s fully equity financed. So no impact of interest costs. NOPAT based on steady-state based on the recurring investments. O’Reilly has invested and continues to invest for future growth. I’d like to get a sense of what the recurring profit is assuming no growth. So, essentially year 10/FY34 assumes is the baseline. What’s the value of the business based on an arbitrary number (typically 18-20x).
On ROIIC - based on my estimates of store openings, sales per store, profitability, cadence in previous distribution center expansion and how they support comparable sales growth especially on commercial. I estimate ORLY to be at a 21-23% ROIIC. What I don’t do is take the book value of invested capital and that ROIC of 49-50% 🙃.
10-12% indeed, but depends. Optionality of proactive capital allocation at good returns (buybacks during corrections, more growth investments) is mispriced. And that’s what steady compounders excel at 😎
This is a good summary. @CT: Do you have a more deep dive explanation to your Valuation Model (Exhibit XXII)? Or a sample / short description to understand the last part for the simplified valuation? Thanks for this!
Hi! Thanks for the question; you can make a very complicated valuation model but here I stick to two components: sum of all free cash flows over FY25 - FY34 plus exit market cap (run-rate NOPAT times multiple) - starting net debt beginning FY25. Then comparing that to the current market (tenth root).
Cool, i prefer simple models too, just trying to understand your line of thought here. Why is the exit market cap based on nopat vs cf? And, I also very much like your forward looking roiic concept, that‘s very clever. How did you get there e.g. 20.7% in fy25? Thanks tons.
NOPAT because I want to value the company in perpetuity assuming it’s fully equity financed. So no impact of interest costs. NOPAT based on steady-state based on the recurring investments. O’Reilly has invested and continues to invest for future growth. I’d like to get a sense of what the recurring profit is assuming no growth. So, essentially year 10/FY34 assumes is the baseline. What’s the value of the business based on an arbitrary number (typically 18-20x).
On ROIIC - based on my estimates of store openings, sales per store, profitability, cadence in previous distribution center expansion and how they support comparable sales growth especially on commercial. I estimate ORLY to be at a 21-23% ROIIC. What I don’t do is take the book value of invested capital and that ROIC of 49-50% 🙃.
Understood, thanks! And your undervalued criteria is an IRR threshold of say 10% on a 10yr basis?
10-12% indeed, but depends. Optionality of proactive capital allocation at good returns (buybacks during corrections, more growth investments) is mispriced. And that’s what steady compounders excel at 😎