O'Reilly Auto OK in Tougher Market

O'Reilly Automotive, Inc. (ORLY) has an excellent growth strategy and exposure to the DIFM ['do it for me'] segment of auto repair along with a strong balance sheet. The company is continuously benefiting from its dual market strategy, strong distribution network as well as unparalleled access to auto parts.

However, rising competition, high gas prices, slowdown in miles driven as well as overall economic slowdown force us to rate the stock a Hold with a target of $31. O'Reilly Auto aggressively continues to open new stores in order to achieve greater penetration in existing markets and expand into new, contiguous markets. The company opened 190 new stores in 2007 and is planning to open 205 stores in 2008.

The company has a strong balance sheet. Its debt-to-total capital ratio is at 6.6 per cent. The company expects to generate revenues of $2.7 to $2.9 billion in 2008. For the first quarter of 2008, same store sales guidance is 1% to 3% and diluted earnings per share guidance is $0.41 to $0.45 on an estimated 116.6 million shares. The company is valued at 15.1x our 2008 earnings of $1.86.

Production Down at Harmony Gold

Harmony Gold Mining Company Limited (HMY) is benefiting from higher gold prices. Going forward, Harmony is focused on reducing its overall operating costs through its continuous operations (CONOPS) agreement and the shut down of loss making shafts.

The company is also reducing its headcount as a measure of cost control. The company has cut down its workforce by 5000 employees in the recent quarter.

On February 15, 2008, Harmony Gold reported second quarter fiscal 2008 results. The company reported a headline loss from continuing operations of $22.45 million during the quarter, compared to a profit of $22.32 million in the first quarter of FY07. The loss in this quarter is primarily attributable to an 8.3% decline in gold production to 398,764 ounces due to a 44-day production disruption at the Elandsrand facility.

Revenue from continuing operations increased 7.8% to $311 million from $267 million reported a year ago due to higher gold prices. The company's operating margin improved to 21.4%.

Currently, Harmony is trading at 24x 2009 earnings of $0.50 per share. Harmony's attractive pipeline of long-term growth projects will boost production, and higher gold prices will support top-line growth. The company is also focused on reducing its operating costs through restructuring efforts. Nevertheless, current gold production remains down from prior-year levels. As a result, we rate the shares a Hold with a target of $11.