SKN | Morgan Stanley Trims O’Reilly Target to $108 as Cost Pressures Weigh on EPS

Key Takeaways

• Morgan Stanley lowered its price target on O’Reilly Automotive to $108 from $110.

• The Overweight rating was maintained despite reduced 2026–2027 EPS forecasts.

• Rising medical and casualty self-insurance costs contributed to margin pressure.

Morgan Stanley modestly reduced its price target on O’Reilly Automotive to $108 while keeping its Overweight stance, reflecting incremental earnings pressure rather than a structural shift in the investment thesis.

The firm cut its 2026 and 2027 EPS forecasts by 4% and 3.5%, respectively, following signs of rising cost pressures in the company’s fourth-quarter results.

Earnings Growth Offsets Margin Compression

O’Reilly reported 9.8% year-over-year growth in net income for Q4 2025, reaching $605.2 million. Diluted earnings per share rose 12.7% to $0.71, driven primarily by solid top-line expansion.

Revenue increased 7.8% year over year to $4.4 billion. Same-store sales contributed 5.6% growth, while expansion of the store base added incremental momentum. The company recorded 207 net store additions over the year, bringing total locations to 6,585.

However, operating margins declined by 80 basis points, falling from 18.8% to 18.0%. Roughly half of the contraction stemmed from higher cost of sales, while the remainder reflected elevated selling, general, and administrative expenses, particularly healthcare and casualty-related claims.

Cost Dynamics in Focus

Morgan Stanley’s downward revision highlights the sensitivity of margins to internal cost structures rather than demand weakness.

Self-insurance-related expenses, including team member healthcare and casualty claims, pressured SG&A ratios. While sales growth remains resilient, sustained cost escalation could limit near-term operating leverage.

The bank’s maintained Overweight rating suggests it views these pressures as manageable rather than structural threats to profitability.

2026 Outlook and Expansion Strategy

Management guided for 225 to 235 net new store openings in 2026 and same-store sales growth between 3.0% and 5.0%. Revenue is projected to reach between $18.7 billion and $19.0 billion, representing mid-single-digit expansion.

Gross margin guidance of 51.5% to 52.0% and operating margin expectations of 19.2% to 19.7% indicate confidence in regaining some profitability traction. Full-year diluted EPS guidance of $3.10 to $3.20 aligns with gradual recovery in margin stability.

Valuation Perspective

The trimmed target price reflects modest recalibration rather than valuation stress. O’Reilly continues to benefit from defensive characteristics within the automotive aftermarket sector, including aging vehicle fleets and recurring maintenance demand.

Execution on cost containment and margin restoration will determine whether earnings growth resumes its prior trajectory.

Outlook

O’Reilly’s long-term thesis remains grounded in steady same-store growth, disciplined expansion, and durable aftermarket demand.

While cost pressures have introduced short-term earnings headwinds, Morgan Stanley’s continued Overweight rating suggests confidence in the company’s ability to navigate rising expenses without derailing broader growth objectives.

For confidential discussions regarding consumer defensive retail positioning, margin resilience analysis, and portfolio allocation within specialty automotive franchises, our senior advisory team is available for discreet consultation tailored to institutional and cross-border investment mandates.