The objective of investing is to raise one’s spending power over the long haul. Unsurprisingly, some stocks have done a better job than others at doing precisely that.
There’s one retail stock that has skyrocketed 53,680% since its initial public offering in April 1993. This means a $1,860 investment made back then would be worth a cool $1 million today. Forward-thinking investors who missed the boat are wondering what the future will hold.
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Can this stock continue to climb in the years ahead?
O’Reilly’s boring business is beautiful
Investors don’t need to identify and invest in the highest-flying tech enterprises to generate market-crushing returns. O’Reilly Automotive (NASDAQ: ORLY) proves that this is true.
This isn’t an exciting business. Through its 6,378 stores (almost all are in the U.S.), O’Reilly sells aftermarket auto parts, like brake pads, motor oil, and batteries, to both DIY and professional customers (think auto mechanics). This hasn’t changed at all over the years.
What O’Reilly lacks in excitement it makes up for in durability. The business experiences steady demand regardless of the economic cycle.
For example, in recessionary times, consumers are less inclined to spend tens of thousands of dollars on a new vehicle. Instead, they’ll do what they need to in order to keep their existing cars functioning. That’s where O’Reilly comes into the picture.
And in robust economic times, when unemployment is low and consumer confidence is high, people tend to drive more. In turn, this increases the wear and tear on vehicles, again supporting demand for O’Reilly.
This attractive setup reduces risk for investors. There’s no need to try and figure out what interest rates, unemployment, or gross domestic product (GDP) growth will do in the near term. Demand will always be there for the things that O’Reilly sells.
Steady fundamental performance
Speaking of durable demand, it’s worth highlighting a phenomenal track record. 2024 was O’Reilly’s 32nd straight year that it reported same-store sales (SSS) growth.
Positive SSS trends are only one piece of the puzzle. The other part is physical expansion. In the past 10 years, O’Reilly added 2,012 net new stores to its footprint, with a current store count of just under 6,400. This also helped propel compound annual revenue growth of 8.8% in the past decade. What’s impressive is that there wasn’t a single down year.
O’Reilly is a scaled retailer that registers strong profitability. It possesses pricing power, as evidenced by a gross margin of 51.3%. That leads to an operating margin that is typically near 20% of sales.
Management has a clear capital allocation policy. After reinvesting back into the business, whether it’s to open new stores or bolster supply chain capabilities, the executive team returns a lot of capital to investors.
In 2024, O’Reilly spent $2.1 billion to repurchase shares. Over the past five years, the outstanding diluted share count was reduced by 25%, which directly benefits earnings per share.
Is now the time to buy?
There’s a lot to like about O’Reilly, like its durable demand and financial strength. These favorable traits have resulted in impressive returns for long-term investors.
However, the current situation must be viewed with a fresh perspective. As of this writing, the stock trades at a price-to-earnings ratio of 31.9. Shares have rarely been more expensive this entire century. This clearly shows how bullish the market has become toward the business. Given O’Reilly’s ability to keep growing its revenue and profit, this optimistic view makes sense.
But investors shouldn’t rush to buy the stock. Although shares could keep climbing, the rich valuation reduces the chances O’Reilly can outperform the market in the next five to 10 years. It’s best to maybe wait for a cheaper entry point before adding the company to your portfolio.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
