Fangyu Liu

liu.4860@osu.edu

Francisco Kollmann

kollmann.2@osu.edu

Huoyu Li

li.5984@osu.edu

Nicole Huston

huston.191@osu.edu

Shanghua Chung

chung.723@osu.edu

October 5, 2015

Team 4

Initiation

O’Reilly Automotive Inc. (NASDAQ: ORLY)

Retail Auto Parts / the U.S.

SELL Ebbing demand triggered by the shortage of prime-age cars Percentage of vehicles in peak repair age (6-10 yrs) shrinks sharply. The number of cars reaching 6 years reduces to an all-time low in 15 years (Car sales was 13 MM in 2008 & 10 MM in 2009), while the number of cars leaving the prime period is rather huge (Sales was 17 MM in 2004). We believe that the decline in prime-age cars poses threat to aftermarket retailers. Margins eroded by swelling commercial revenues Margins will narrow if O’Reilly expands revenues from commercial segment, the focal market that is expected to retain steadily growing potentials. Most commercial clients are service providers that command greater bargaining power than DIY customers. We expect that margins cannot widen further if O’Reilly keeps increasing its commercial customer base. Loss of key competitive advantage in distribution system O’Reilly’s dual market strategy, supported by its market-leading distribution framework, is being duplicated by major competitors such as AAP, GPC, and AZO. The industry leaders have built their cross-state network that makes it possible to replenish stock on a daily or two-day basis. O’Reilly will decelerate as its logistics prototype is reproduced by large retail chain stores. Greater obstacle in untapped market AAP and AZO, the top 2 players, have occupied the Eastern United States where O’Reilly has less foundation. Their predominance in the local market leaves few chances with O’Reilly to pump up sales without stealing from them. Given that O’Reilly will confront direct challenge from the market leaders, its growth would probably be ground to a halt as competition intensifies in unserved market.

Company Data

Price $254.21

Price Target $208.00

Potential Gain 18.18%

52-week Range $146.22 -

$258.15

Market Cap. (M) $25,081

O’Reilly Share Price and Volume

$1.6

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Industry Overview Long-term growth slows though fueled by short-term tailwind The auto part retailing industry has undergone stagnant period with annual growth rates hovering between 0~5% for the past eight years. The industry currently benefits from the rebound of driving mileage and the prolonged rise in average vehicle age. The trends are expected to continue thanks to the sagging oil prices and the better-engineered models that extend auto’s durability. The recent oil market downturn also prompts car driving and therefore pushes demand for maintenance and repair. However, the plummet in auto sales since 2008, which leads to a scarcity of vehicles aged between 7-10 years, a prime period for auto aftermarket retailers, will deter consumption in the following 5 years. Car sales volumes dropped 18% in 2008 and 21% in 2009. Even though the impact is somewhat neutralized as the life of cars is extended, auto owners generally cut spending on cars older than 10 years.

Increase in miles traveled and average car age prompts demand for auto parts

Auto sales drop since 2008 reduces the number of cars reaching prime aftermarket age

Source: Federal Reserve Bank of St. Louis, U.S. Department of Transportation

*Sales in 2015 is accumulated to August. Source: Federal Reserve Bank of St. Louis

Margins are compressed as retailers raise exposure to do-it-for-me market The competitive landscape of the industry has seen significant shift to do-it-for-me/commercial market from do-it-yourself/retail market. The commercial market is expected to have higher growth potential than the saturated DIY market primarily because newly designed automobiles become more complex and, therefore, harder to be repaired. The DIY segment is mature with 40% of market share claimed by the top 4 retailers. The customers have a larger portion of disposable income fluctuating with the economy, so the market’s revenue is comparatively volatile. Unlike the DIY market, the commercial market is highly fragmented because it is traditionally seized by small regional shops.

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Commercial segment is expected to enjoy higher growth momentum, accounting for 66% of market share in 2016

Source: Automotive Aftermarket Industry Association, J.P. Morgan estimates

Professional retailing, which is rather customized by individual needs, is more responsive to demographics, models of vehicles, and automotive repair facilities in different regions, a subtle difference in customer profile that yields space for local dealers to thrive. The absence of large chain stores in commercial segment leaves opportunities to new entrants who now expand market reach and seek for possible consolidation. However, retailers earn lower gross margin from commercial customers in that most of the buyers are repair shops and mechanics who are concerned about prices and inventory availability. But since commercial market will be the main driver that boosts aftermarket retail revenue, those who hesitate to respond the shift in consumption pattern are likely to suffer dwindling market share cannibalized by professional service providers, an inevitable predicament that puts gross margins under pressure. Consumers are price takers in the market We see demand is fairly inelastic in the auto parts industry. In the short run, consumers rely on their car as their only source of transportation. There is a need to do necessary repairs immediately if a car is not in working order. Demand in the industry is insensitive to economy. During a recession, we see individuals putting off purchasing a new vehicle, and instead focusing on repairing their current vehicle. During an expansion we expect consumers to be more likely to purchase a new car, which will lead to a reduction in older vehicles being driven during this period.

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Retail ($T) 41.08 41.16 40.60 43.44 46.33 46.94 47.59 48.78 49.60 50.61

Commercial ($T) 78.03 78.30 78.21 81.10 84.30 87.06 88.42 92.40 96.09 99.45

Retail Growth 9.30% 0.50% -1.40% 9.80% 7.20% 1.30% 1.40% 2.50% 1.70% 2.00%

Commercial Growth 0.20% 0.20% -0.10% 2.30% 3.60% 3.30% 1.60% 4.50% 4.00% 3.50%

Trill

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Retail / Commercial Revenue Breakdown in the U.S.

ORLY obtains operating cap. through supplier financing.

Source: Bloomberg

Top 10 retailers continue to soak up market share

Source: O’Reilly’s analyst day presentation in Aug. 2015

Business Model Sales has edged up lately with tailwind from commercial segment O’Reilly is reaping the rise in commercial market due to company’s success of dual market strategy. The company is an early adopter that serves both DIY and commercial segments, a targeting strategy that is being duplicated by O’Reilly’s major competitors to capture the increasing demand for professional services. We anticipate that O’Reilly will hold a leading position over small and medium regional retailers because of the large capital investment indispensable to the strategy’s implementation. O’Reilly has established an extensive distribution network that maintains high availability of in-store parts. Since commercial customers care about product availability and instant delivery, it is critical for retailers to keep diversified inventory in order to reach deals. O’Reilly delivers at least five times a week to replenish the stock, building a competitive edge that bars potential entrants unable to construct nationwide distribution infrastructure. But before parts are sold, high stock brings the need for financing. O’Reilly secures its funding by initiating a vendor financing program that allows the company to display brand parts on its shelf without large up-front payments. The program proves successful as shown by O’Reilly’s continuingly high percentage of payables to inventory. We believe that the unequal status between O’Reilly and its suppliers is due to the part manufacturer’s attempt to secure place of display to end customers. We do not expect a reverse between the two sides provided that the retailing market remains more consolidated than the manufacturing side. O’Reilly confronts harsher challenge in untapped markets. O’Reilly is placed at disadvantage in the east coast states. The chain retailer expects to grow its store base to 6,000 ~ 6,500 locations in a static competitive environment. It operates 4,465 stores as of June 30, 2015, with mere 61 stores in the Northeast. We are speculating that O’Reilly has confronted direct challenge from the first tier competitors in the eastern United States, especially the booming service provider Advance Auto Parts that dominates the marketplace along the east coast. Even so, we forecast that O’Reilly’s dual market strategy will still capture market share from local auto part vendors. The top 10 retailers have been expanding store count, with the leading 3 players controlling 40% of overall operations in 2014. We infer that their increase in market share is due to the edge of setting up integrated distribution networks that regional service providers cannot establish. Among the top retailers within the industry, we see companies tailoring their distribution system towards their split in the DIFM and DIY markets. We believe that O’Reilly, experienced in business acquisition, favors possible takeover to enter the unexploited Northeast region. But in the short term, we expect its priority is to enhance exposure in market in which O’Reilly battled head-to-head with the industry’s dominant participants, as shown by the retailer’s remarkable new store openings in East North Central and South Atlantic in 2015. However, the intensifying competition could be a sign that the industry is maturing and consolidating and that the unserved demand is nearly exhausted. Therefore, we view O’Reilly as less prospective than does the current market consensus.

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The Northeast is grabbed by major retail competitors

Source: Company Reports

Competition AutoZone (Ticker: AZO) AZO is the largest auto parts vendor in 2015 with market share estimated to be 6.9% in the U.S. The company has long been the prominent retailer in DIY segment and occupies 15.9% of DIY revenue in 2014. AZO has aggressively launched programs that catered to do-it-for-me customers for the past 4 years but the productivity of each program remains flat. AutoZone’s commercial sales was mainly bolstered through initiation of new programs. The company makes commercial sales per store around $255K less than that of AAP and ORLY and has few noticeable approaches to improve its disadvantage in commercial segment. It is believed that AZO has built its distribution network that caters to retail customers who place less emphasis on product availability and fast delivery than do commercial customers. We anticipate that AZO will retain low single-digit growth rate that converges toward the long-term growth of the DIY market as the company struggles to profit from the rising commercial sector. Advance Auto Parts (Ticker: AAP) AAP is the second-largest auto parts vendor in the U.S. with estimated market share at 6.8%. The company owns the most stores across North America and has a balanced revenue mix in retail and commercial markets. AAP acquired General Parts in late 2013, raising its brand’s visibility to commercial customers. The acquisition established the company as the first tier auto parts vendor and increased half of its market share in commercial segment in 2014, a stride that made AAP surpass ORLY as the second-largest professional service provider. We consider AAP the most direct competitor of ORLY seeing that it targets a similar market mix and currently reshapes its distribution system to suit the needs of both retail and commercial customers, the targeting strategy also adopted by ORLY. Since AAP dominates the marketplace in east states, we believe that ORLY can hardly inflate customer base without stealing from AAP.

Genuine Parts (Ticker: GPC) GPC ranks fourth in overall industry but is the top player in percent of total commercial market share. GPC’s distribution centers have access to 459,000 parts, which is around 300,000 more than that of O’Reilly’s distribution centers. With extensive inventory, GPC has built large commercial customer base and is expected to enjoy solid growth momentum. However, it shares the same problem with other major retailers as the market becomes mature with national players having established widespread foothold that squeezes further development. It is certain that GPC must compete with local retail stores in order to raise market share and sustain its prominent sales growth.

Revenue Mix of Top 4 Auto Part Retailers

Source: Company Reports and J.P. Morgan estimates

Ratio Analysis

ORLY AZO AAP GPC

Gross Margin 51.4% 52.1% 45.2% 29.9%

Profit Margin 10.8% 11.3% 5.0% 4.6%

Return on Assets 12.34 14.85 7.3 8.93

Return on Equity 39.06 - 27.98 21.39

Asset Turnover 1.14 1.32 1.46 1.93

Inventory Turnover 1.42 1.51 1.66 3.59

Debt/Assets 21 58 20 9

Debt/Equity 69 - 81 23

Current Ratio 1.08 0.79 1.27 1.56

Quick Ratio 0.14 0.07 0.18 0.56

Interest Coverage 23.8 - 11.6 44.8

43%

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100%

AAP AZO GPC ORLY

Retail Commercial Other

Profitability: ORLY has the 2nd best margins and returns in the industry, only slightly behind

AZO. This demonstrates the company’s strong operational efficiencies and economies of scale

when compared to its competitors.

Efficiency: ORLY has the lowest turnover ratios when compared to its peers. This demonstrates

management’s strategy to maintain higher levels of inventory in stock.

Long-term Solvency: Excluding GPC, ORLY has the lowest debt ratios. The company has no

short-term debt. This demonstrates ORLY’s greater flexibility because it has more room to

increase leverage, especially when compared to its main competitor AZO.

Liquidity: Excluding GPC, ORLY has the 2nd best liquidity ratios and the highest interest

coverage capabilities in the industry. This shows the company’s strong cash position as well as a

solid safety net to cover interest expense.

DuPont analysis: As stated previously, ORLY has the lowest asset turnover when compared to

its competitors. At the same time, the company has lower leverage and high operating margins.

Therefore, it has been generating high returns on equity over the years. However, as the

industry’s demand move towards DIFM, we expect this trend to result in lower margins for auto

parts retailers. Also, the company’s expansion could negatively affect efficiency and, therefore,

decrease asset turnover even further. Therefore, both these trends could add downward

pressure on the company’s return on equity in the future.

Risk Overview

Macroeconomic and Environmental Risk

· Macroeconomic Risk

As residents’ income continues to grow, wealth effect starts to emerge, and bank lending increases, so

private disposable amount of money is growing and US economy situation gradually turns for the better.

This getting better situation may adversely influence our estimation of whether O’Reilly Auto Parts

should expand continuously. Future use and growth of free cash flows will determine O’Reilly’s ability

to handle adverse situations that may arise.

Nevertheless, that the Fed started to raise interest rates will bring some tightening effects, which means

that the tail risk of financial crisis will still give US a big challenge and that this prudential policy has

limited controlling power over US economy. Therefore, predicting properly is necessary and largely

expanding new stores remains to think differently. Otherwise, being too optimistic will give rise a

potential for huge loss of investment.

· Weather Risk

Extreme weather causes car accidents to increase and automobile breakdowns to become more likely

inclement conditions. This becomes a benefit to O’Reilly in the areas that it operates in that experience

inclement weather patterns. Should chose O’Reilly to continue opening new stores in the future, it is

important for this risk to be taken into consideration.

Industry Specific Risk

· New Technology Risk

In the long term future of O’Reilly, we must consider future innovations that could take place within the

industry. Currently, inventory turnover decreases from 1.7 in 2005 to 1.4 in 2014, which means

inventory decreases in a relatively slow rate. But actually, inventory increased from 2013 to 2014.

What would happen if 3D printers became a viable option for producing auto parts? Then the whole

inventory will become a huge burden for auto parts companies, which means there will be a large burst

on their inventory sales. However, in the long run, 3D printer can be a useful tool for reducing inventory

and warehouse rents. This two-sided effect remains to be seen what this might mean for the auto parts

industry.

Another factor to consider is that as cars are becoming “smarter” with more technology building in, we

expect to see increased accidents precaution and potentially certain self-repairing functions within

vehicles. The self-repairing function is already a reality within the software of newer vehicles, where

tests and self-repairing functions are automatically run when an error occurs within a vehicle.

· Asymmetry Information and New Market Risk

Hybrid and digital cars, such as Google cars and Apple cars may be available to the general consumer in

the near future. As new types of hybrid and digital cars technologies are brought into the auto markets,

auto parts companies will need new information and strategies to stay relevant within this niche

market. Being the first to enter into this market could mean major growth, while failure to recognize a

potential shift in the demand of consumers could mean large losses in sales. For example, young people

nowadays tend to use Uber as their preferred driver platform to go out. So, this car sharing issue will

bring more maintenance services to auto parts industry. Therefore, high demand in auto parts will

emerge in the near future. But if auto parts companies do not spot this market, it will bring huge loss of

market share.

Company Specific Risk

· Staff and Unemployment Risk

It’s really hard to maintain excellent faculty and staff all the time. Periodic increases in wages is

necessary to remain competitive and will also help with retention and reducing employee turnover.

News from Johnson Controls Inc. stated that the manufacturer will attempt to lift profits by cutting

3,000 salaried job in order to leave behind other automotive competitors. In the same industry, when

the first same pattern company adopts some strategy to make a push on profit pursuit, other

competitors will immediately adopt similar methods to catch up with the first implementer. So this

potential cutting job offers will give rise to pressure on the remaining business units to improve their

performance and wealth decreasing for residents. Potential increases in the minimum wage would also

affect O’Reilly in a negative way. Should the minimum wage rise, this would mean lower margins for the

company and other similar retailers.

· Production & Operation Risk

There is increasing pressure within the industry as sales are moving to online channels making price

comparison much easier to the DIY customers and thus we expect to see the profit margin of auto parts

retailers decline in the future. This would be a big change for O’Reilly that has held fairly high margins

in its history. With margins shrinking as price comparison between competitors becomes easier

through online platforms, O’Reilly will need to adapt their strategy in order to stay competitive.

Scenario Analysis

Future returns for O’Reilly depend largely on the future outlook of the economy as a whole. The auto industry’s main drivers include gas prices, interest rates, unemployment, personal income, average age of vehicles, and miles driven. During a recession, less new car sales due to a variety of factors will be beneficial for O’Reilly in the short run because consumers are more likely to repair and maintain their current vehicles. Consumers have less disposable income. In the scenario of slow growth oil prices could increase or stay stable while consumer disposable income increases. In an expansionary period oil prices will increase leading to fewer miles driven. Also increased consumer income will increase consumer spending lowering average vehicle age as more new cars are purchased. Moving forward we predict a 60% chance of growth (slow growth or expansion) and a 40% chance of a recession. It is likely that interest rates will rise within the next few months meanwhile oil prices will remain low at least for the near future.

Valuation

The company is evaluated by the application of an estimated discount rate to two valuation

methodologies:

· Discount Rate: CAPM & Bond-Yield Approach

· Discounted Free Cash Flow to Equity (FCFE)

· Multiple Analysis

After considering the factors involved with each valuation method, different weights were assigned to

each model to determine the specific price target for O’Reilly’s common share.

Required Return on Equity

The discounted valuations all use a required return on equity to discount the future cash flows. A 8.25

percent required return on equity was used as calculated the average of the capital asset pricing model

and the bond-yield-plus-judgment approach.

Capital Asset Pricing Model

The current risk free rate on government bonds is assumed to be 2.18 percent (10-yr). According to

Bloomberg, the equity risk premium for U.S. companies as of 2015 is 7.5 percent. Finally, the company’s

beta of 0.72 is used and when all are combined gives a required return on equity of 7.6 percent.

Bond-Yield-plus-Judgment: O’Reilly has approximately $1.4 billion of dollars in unsecured senior

notes that are due between 2021 and 2023. The interest charge on this debt equals to 4.9 percent,

which is also justified by the company’s credit rating (S&P BBB+). An additional 4 percent as risk

premium, which is typical in U.S. markets, gives a required return on equity of 8.9 percent. Going

forward the discount rate of 8.25 percent will be used as the required return on equity.

Discounted Free Cash Flow to Equity

The discounted free cash flow to equity (FCFE) valuation uses forecasted figures determined in the pro

forma statements. Assumptions for the forecasted inputs in this calculation are highlighted in the pro

forma statements and are based on historical averages as shown on Appendix 2. Forecasting FCFE over

the next five years using these assumptions shows annual growth from 2015 to 2019. The long term

growth rate of 3 percent used in this model yields an intrinsic value of $232 per share.

Multiple Analysis

The multiple analysis valuation uses a combination of two different groups of multiples to value

O’Reilly’s shares: comparable companies’ average (excludes GPC); and the industry average which

includes all 4 competitors of this subgroup. The comparable companies used are: Advance Auto Parts

and AutoZone. The trailing twelve months price to earnings, price to free cash flow, and price to sales

multiples were found for these companies. These multiples are averaged to determine a comparable

company multiple for each metric.

The multiples for comparable companies carry a 80 percent weight in the final weighted average

because we believe that as the industry consolidates these 3 competitors will have similar growth rates,

making it reasonable to put the greatest weight on these figures. It is also reasonable to assume that

O’Reilly’s multiples will eventually drift towards the comparable companies’ average, especially

AutoZone, as it expands and matures to similar levels as the largest auto parts retailer. Therefore, the

final weighted average multiples were used with 2015 forecasted figures to determine the intrinsic

value of $197 per share.

Target Price

O’Reilly’s intrinsic value was calculated using a weighted average of the valuation methods described

above. Multiple analysis carries a 70 percent weight in the final weighted average because we believe

this method provides a safer and more realistic valuation. The discounted cash flow model depends on

several assumptions, which increases potential for error, and therefore is less reliable. These valuation

methods were averaged to determine an intrinsic value of $208 per share. We recommend that O’Reilly

be sold or shorted based on our analysis of the industry and valuation of the company.

Appendix 1:

Company Description

O’Reilly Automotive, Inc. is the third largest auto parts retailer in the U.S. in terms of revenue.

The company’s major competitors include Advanced Auto Parts, AutoZone, and NAPA/Genuine

Parts. Headquartered in Springfield, Missouri, O’Reilly was founded in 1957 by the O’Reilly

family and completed its IPO in April 1993.

O’Reilly sells automotive aftermarket parts, tools, supplies, equipment and accessories to both

do-it-yourself (“DIY”) market, which made up 58% of sales in 2014, and the do-it-for-me

(“DIFM”) market, which made up 42% of sales in 2014, a dual market strategy with revenues

coming from the two distinct segments. The DIY segment yields better margins than DIFM,

while DIFM grows faster than DIY.

O’Reilly’s main growth strategy is to not only further penetrate into existing markets such as in

California and Texas, but also continue to expand into new markets or less saturated areas in

the U.S. through new stores and acquisition of local retailers. Currently, the company has more

than 67,000 employees and operates 4,465 stores in 43 states, including Alaska and Hawaii,

with the number of stores consistently growing each year. Texas, California, Missouri, Georgia

and Illinois make up 40% of the Company’s total stores.

The Company’s operation is supported by a strategic regional tiered distribution network,

including 26 regional distribution centers and 283 hub stores. This network provides O’Reilly

with timely access to its products and enables the company to optimize its inventory level.

Management Overview

O’Reilly trains and promotes senior management from within the company. The company has a

senior and experienced leadership team. The senior management has years of experience with

automotive aftermarket as most high level executives have been with the company for at least

15 years. The CEO and CFO positions are fairly stable, and this may add to the consistency of

the company’s management.

O’Reilly’s ownership structure is substantially

dispersed. The shares of common stock

owned by directors and executive officers

dropped to 3.72% from 19.7% and the

number of directors and executive officers

increased from 11 to 21. By March 2015, only

three institutional owners (T. Rowe Price

Associates, Inc.; The Vanguard Group;

Blackrock, Inc.) own more than 5% (all less

than 10%) of the company’s common stock. A

potential benefit of this structure is that dispersed ownership creates a democratic atmosphere

0

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and a balance of power among shareholders. Conversely, such ownership structure could

result in inefficient decision making due to lack of personal investment in the company.

Besides, the continuous decrease of management ownership supports the sell position we take.

O’Reilly applies incentive compensation plans based on several objective performance goals to

motivate its employees and to attract and retain qualified management people. The company’s

Board of Directors requires independent directors, executive officers and executive and senior

vice presidents to own shares of the company’s common stock with market value ranging from

2-5x of their base salaries. This stock ownership requirement further aligns the directors and

executive officers’ interests with those of the company’s shareholders. Besides the stock

ownership requirement, the company also grants non-qualified stock option awards for

employees upon their promotion or appointment to certain defined positions. O’Reilly believes

through the stock option incentive, the key executives and managements are more likely to set

up long-term personal goals within the company.

Named Executive Officer Chairman of

the Board

Chief Executive

Officer

Chief Financial

Officer

Executive Vice President of Expansion

Executive Vice President

of Store Operations and

Sales

Base Salary 64% 28% 31% 44% 34%

Equity Incentive Compensation 31% - - - -

Stock Options - 28% 31% - 28%

Non-Equity Incentive Compensation - 41% 36% 53% 36%

Other Benefits 5% 3% 2% 3% 2%

Total 100% 100% 100% 100% 100%

O’Reilly has added significant value through share buybacks since January 2011. In the past

five years, the company has made 10 additional $500 million share repurchase authorizations.

The last repurchase was announced on May 29, 2015. And the company has no intention of

stopping these share buybacks.

Leadership

David O'Reilly - Chairman of the Board

David O’Reilly has been a full time employee since 1972, serving as the Chairman of the Board

since 2005. In his 40+ years of experience, David has worked in almost all capacities within

O’Reilly and has developed expertise in the operation and strategic business development.

Greg L. Henslee - President and CEO

Having served O’Reilly for 30+ years, Greg Henslee became CEO in 2005 and President in 2013.

He is mainly responsible for the merchandise, information systems and distributions issues.

Thomas McFall - Executive VP of Finance and CFO

Thomas McFall joined O’Reilly in 2006 as Executive VP of Finance and CFO. He has many senior

management experiences in finance, accounting, auditing, distribution and logistics operations.

Appendix 2

Assumptions of discounted cash flows model

Bad Neutral Good

Sales Growth 3% 5% 8%

Gross Profit Margin 48% 50% 52%

Operating Income Margin 13% 15% 18%

Income Before Taxes Margin 12% 15% 17%

Net Income Margin 8% 10% 12%

Income Statement (USD in thousands)

2015(f) 2016(f) 2017(f) 2018(f) 2019(f) 2020(f)

Sales $ 7,576,885 $ 7,955,729 $ 8,353,516 $ 8,771,192 $ 9,209,751 $ 9,670,239

COGS 3,788,443 3,977,865 4,176,758 4,385,596 4,604,876 4,835,119

Gross Profit $ 3,788,443 $ 3,977,865 $ 4,176,758 $ 4,385,596 $ 4,604,876 $ 4,835,119

SG&A 2,651,910 2,784,505 2,923,731 3,069,917 3,223,413 3,384,584

Operating Income $ 1,136,533 $ 1,193,359 $ 1,253,027 $ 1,315,679 $ 1,381,463 $ 1,450,536

Taxes Payable 378,844 397,786 417,676 438,560 460,488 483,512

Net Income $ 757,689 $ 795,573 $ 835,352 $ 877,119 $ 920,975 $ 967,024

# of Shares Outstanding 104,262 104,262 104,262 104,262 104,262 104,262

EPS $ 7.27 $ 7.63 $ 8.01 $ 8.41 $ 8.83 $ 9.27

Discounted Cash Flow to Equity (USD in thousands)

2015(f) 2016(f) 2017(f) 2018(f) 2019(f)

Net Income $ 757,689 $ 795,573 $ 835,352 $ 877,119 $ 920,975

Noncash Charges 200,787 210,827 221,368 232,437 244,058

Investment in Fixed Capital (26,519) (27,845) (29,237) (30,699) (32,234)

Investment in Working Capital 11,365 11,934 12,530 13,157 13,815

Free Cash Flow to the Firm $ 973,630 $ 1,022,311 $ 1,073,427 $ 1,127,098 $ 1,183,453

Interest Expense - - - - -

Change in Net Borrowing - - - - -

Free Cash Flow to Equity $ 973,630 $ 1,022,311 $ 1,073,427 $ 1,127,098 $ 1,183,453

Shares Outstanding 104,262 104,262 104,262 104,262 104,262

FCFE per Share $ 9.34 $ 9.81 $ 10.30 $ 10.81 $ 11.35

Appendix 3

O’Reilly - SWOT Analysis