O’Reilly Automotive: A Top Pick for Investment

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In a recent analysis conducted by equity analyst Garrett Nelson in CFRA Research’s flagship newsletter, The Outlook, O’Reilly Automotive (ORLY) has been identified as a top investment opportunity, receiving the highest recommendation of 5-STARS, or Strong Buy.

O’Reilly Automotive is a significant player in the automotive aftermarket parts and accessories retail sector, boasting an extensive network of 5,971 stores spread across 47 states in the US and Mexico. What sets ORLY apart is its dual market strategy, catering to both Do-It-Yourself (DIY) customers and Do-It-For-Me (DIFM) customers such as auto repair shops. In 2022, 56% of the company’s sales were to the DIY market while 44% were to DIFM customers.

The investment appeal of ORLY is supported by positive auto aftermarket fundamentals, driven by a record-high average U.S. vehicle age of 12.5 years as of 2023. Furthermore, ORLY is considered a high-quality brand with approximately 51% gross margins, a history of returning capital to shareholders via share repurchases, and a strong stock performance during periods of slower economic growth.

With an expected solid comp sales growth of around 7.5% and plans to open 185 new stores in 2023, ORLY is well-positioned for growth and market share gains. The company has a consistent track record of profitable and aggressive greenfield growth, exemplified by the opening of at least 155 net new stores annually since 2011.

The company’s recent earnings performance has been robust, with only two bottom-line misses in the past 15 quarters, and conservative guidance providing a strong footing for growth. Projections for earnings per share (EPS) stand at $38.20 for 2023, $43.45 for 2024, and $46.85 for 2025, indicating solid growth from the $33.49 earned in 2022.

In the third quarter of 2023, ORLY exceeded expectations, reporting EPS of $10.72, a significant 17% increase from the previous year. This outstanding performance was driven by better-than-anticipated revenue, an 11% increase to $4.20 billion, and an 8.7% rise in comp store sales, surpassing consensus figures.

The company also demonstrated strength in its gross margin, which expanded to 51.4%, prompting a raise in the 2023 EPS guidance following the earnings release. ORLY’s aggressive share repurchase program has been a key factor contributing to strong EPS growth, with the company repurchasing approximately 93.9 million shares at a cost of $23.04 billion since 2011.

Despite potential risks such as inflationary pressures, supply chain issues, and competition from online sellers, a 12-month target price of $1,100 has been set for ORLY. This target is based on 23.5x the 2025 EPS estimate, reflecting a justified premium to the stock’s 10-year average forward P/E of 22.4x.

In conclusion, O’Reilly Automotive emerges as a standout choice for investment, supported by its strong market position, growth prospects, and solid financial performance. Investors looking for a promising addition to their portfolio may find ORLY to be a compelling option.

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