Elite businesses often outperform the broader financial markets. This is because strong business models translate into the kinds of growing revenue and earnings that propel a stock's share price higher year after year.
O'Reilly Automotive (ORLY -0.97%) is arguably a tremendous wealth-building stock: A $10,000 investment in its stock five years ago would now be valued at roughly $31,000. That's leagues above the approximately $18,000 that the same investment in the S&P 500 index would be worth today with dividends reinvested.
After such a remarkable performance, investors may have the following questions: Can O'Reilly Automotive continue to beat the market in the years ahead? And is the stock still a buy for growth investors?
Let's peek under the hood at the company's fundamentals and valuation to decide.
Robust auto parts demand is driving double-digit business growth
Since its founding in 1957 in Springfield, Missouri, O'Reilly Automotive has grown to become the largest auto parts retailer in the United States by market capitalization. The company's $56 billion market value is supported by a network of more than 6,000 stores in the U.S., Puerto Rico, and Mexico.
O'Reilly's sales surged 10.8% higher year over year to $4.1 billion in the second quarter ended June 30. What was behind the company's healthy top-line growth during the quarter?
| Metric | Q2 2022 | Q2 2023 |
|---|---|---|
| Total store count | 5,900 | 6,071 |
| Comparable store sales growth rate (YOY) | 4.3% | 9% |
| Net Margin | 15.7% | 15.4% |
Data source: O'Reilly Automotive. YOY = year over year.
According to the most recent data available from S&P Global Mobility, the average age of vehicles in the U.S. is 12.5 years. The record age of U.S. vehicles is driving steady demand for auto replacement parts, which is benefiting the auto parts retail industry overall.
It also doesn't hurt that O'Reilly continues to provide customers with industry-leading parts selection and customer service. This is especially important because co-president Brent Kirby noted in the recent earnings call that product availability and customer service are often just as significant for customers as price.
For these reasons, O'Reilly was able to deliver high-single-digit comparable store sales growth for the second quarter. Coupled with new store openings, this explains how the company generated double-digit sales growth in the quarter.
O'Reilly's diluted earnings per share (EPS) soared 16.4% over the year-ago period to $10.22 during the second quarter. Elevated inflation and a bigger store footprint led the company's total expense growth (11.9%) to marginally exceed its sales growth for the quarter.
This is what caused O'Reilly's net margin to slightly contract in the quarter. But a staggering 6.6% reduction in the company's diluted share count via its share buyback program helped diluted EPS to grow at a faster clip than sales during the quarter.
Image source: Getty Images.
A lengthy growth runway
O'Reilly's vigorous growth in the second quarter is one thing. But growth investors thinking about adding the company to their portfolios need to be confident that such growth can be sustained.
Fortunately, O'Reilly's high growth looks likely to persist moving forward.
For one, the company is in the early stages of growth in the Mexico market that it entered in 2019, with just 44 stores as of June 30. O'Reilly just opened its first distribution center in Guadalajara weeks ago, which could eventually service 250 stores in that area of Mexico. Gradual expansion throughout the country could bring the company's total store count well into the hundreds, or even low thousands.
Another encouraging sign for O'Reilly is that with just two of its stores closing in the first half of 2023, consumers are still welcoming new stores. This suggests that the company won't have to worry about the threat of market saturation for at least the foreseeable future. That is why analysts believe diluted EPS will grow by 11.2% annually for the next five years.
The valuation is lofty but fair
Roaring 35% higher in just the past 12 months, O'Reilly's stock is firing on all cylinders as of late. However, the auto parts retailer could have some upside left in the tank. This is because, when considering its industry leadership status, O'Reilly's forward price-to-earnings (P/E) ratio of 22.2 is still within reason compared to the specialty retail industry average forward P/E ratio of 15.9. Thus, analysts have an average 12-month share price target of $994 -- 7% capital appreciation from the recent $929 share price.
