If I asked you to name a stock that has increased more than eightfold over the past decade, you'd probably begin searching within the tech sector. A boring, stable company like O'Reilly Automotive (ORLY 0.39%) has done just that. The automotive aftermarket parts supplier has historically been a fantastic company to own, but recent developments require a reassessment of the investment thesis.
O'Reilly Automotive possesses outstanding financials. Earnings have risen at a compounded annual rate of 12.3% from fiscal 2014 through fiscal 2019. In fact, 2019 was the company's 27th consecutive year of same-store sales growth. During the last five years, diluted shares outstanding have decreased more than 26%. This is extremely advantageous, as it boosts the per share earnings applicable to existing shareholders. Although the buyback program was temporarily suspended in March because of the coronavirus pandemic, it's always good to partner with a management team focused on utilizing free cash flow to reduce share count. Furthermore, CEO Greg Johnson does a great job at being very clear and transparent about the company's capital allocation strategy in his annual shareholder letters.
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Impact of COVID-19
O'Reilly Automotive is essentially recession-proof, as consumers use and extend the life of their existing automobiles instead of purchasing a new car during times of economic stress. This raises the need for maintenance and repair parts, a boon for the company. However, a robust economic environment is good for business as well. As new automobile sales climb, the total population of vehicles on the road goes up.
While it's no surprise that a growing and aging vehicle fleet is beneficial to O'Reilly Automotive, probably the most important factor to the company's success is the number of miles driven in the U.S. With the country under stay-at-home orders since the onset of the pandemic, this metric has declined substantially. Comparable store sales fell 13% during the four-week period from mid-March through mid-April. Deemed an essential business, the company has kept stores open and maintained operations to support those people who still need to get from one place to another.
An imminent recovery
With restrictions easing in various states across the country, driving could be making a huge comeback. For investors who shunned O'Reilly Automotive's stock with the belief that miles driven would take a material hit and could possibly take years to recover, it might be time to reconsider.
Apple provides data on direction requests via its Maps application, broken down by walking, driving, and public transit. As of June 1st, requests for driving directions on Apple Maps in the United States were up 24% since January 13th -- fully recovered since the lockdown and then some. Some surmise this could be the reinvention of the role of the automobile in our lives. It all makes sense intuitively. Why risk my family's health and safety by flying in an airplane or taking public transportation when I have the safety, protection, and convenience of my own shelter-on-wheels?
It's a very interesting perspective to think through when analyzing O'Reilly Automotive's investment merits going forward. Clearly Americans are planning on traveling again, but this time with a renewed focus on driving. If the number of miles driven in the U.S. begins ramping up in the next few months, we will know exactly why. Greg Johnson mentioned that even though "the lasting impact of economic damage could persist well after the more restricted stay-at-home measures are lifted, we are well positioned to rebound quickly and return to solid growth, even if the broader economy is still under pressure."
When looking back throughout history we've seen great companies make it through some difficult times. The best thing a long-term investor can do is to keep riding trends that support the companies he or she owns. With O'Reilly Automotive, the secular tailwinds that have propelled it to produce market-beating returns should continue for the foreseeable future.
