With the recent signing of the new $1.9 trillion COVID-19 relief package, many Americans can soon expect fresh $1,400 checks to hit their bank accounts. After making sure that the bills are paid and that a sizable emergency fund is set up, one prudent action is to invest that cash in the stock market with a long-term time horizon.
With extra capital to put to work, investors should consider adding O'Reilly Automotive (ORLY 0.23%) to their portfolios. Operating in a sleepy industry, this automotive aftermarket parts leader has actually done exceptionally well over the past year.
But it still doesn't attract the attention it deserves. Let's find out why this consumer staple warrants a look from those wanting to put new stimulus money to work.
Image source: Getty Images.
Pandemic boost
Every investor already knows that some of the clear and obvious winners from the pandemic's disruption were e-commerce, video conferencing, telehealth, and streaming entertainment businesses. But O'Reilly should be added to that list.
After revenue rose only 2.7% in Q1 2020, it soared in Q2 (19.4%), Q3 (20.3%), and Q4 (13.9%), resulting in a record-breaking year for the company. 2020 was the 28th consecutive year that O'Reilly registered comparable sales growth, demonstrating the company's lengthy history of success irrespective of the overall economic environment.
O'Reilly's strong performance throughout the year was driven by do-it-yourself (DIY) customers. These shoppers focused their time and money on increased repair and maintenance (delaying new car purchases), something the company expects during times of economic uncertainty. In Q4, the momentum continued, as ticket counts and average ticket size showed sizable gains.
The do-it-for-me (DIFM) side has lagged behind, however. The ultimate customers here are usually people who can work from home, so it makes sense that less driving means lower demand for professional repairs. But on the most recent earnings call, CEO Greg Johnson did mention that this segment "performed well and strengthened as [we] progressed through the quarter." As total miles driven returns to normal levels, the DIFM business should rebound nicely.
Long-term outlook
O'Reilly management admits that 2021 may not be as lucrative as last year, guiding for sales growth to be flat and comps to come in slightly negative to flat due to a difficult comparison and because consumer spend may shift to things that were delayed during the pandemic. But even if the company's long-term prospects remain bright, it's not surprising that most investors still fixate on the next 12 months. This contrast in time horizons presents a lucrative opportunity for those few investors willing to buy and hold for the long haul.
O'Reilly still managed to open 156 net new stores in 2020, and has plans to open roughly 170 this year. So there's plenty of expansion inherent in the business model. Furthermore, the company is prudently sprouting into Mexico, where it now has 22 locations. In addition to bolstering its domestic footprint, the market south of the border should provide a boost to O'Reilly's sales for many years to come.
One important thing to note about O'Reilly is that demand for its products is incredibly recession-resilient, meaning investors can expect the business to perform reasonably well in good and bad economic times. This key fact, when added to O'Reilly's strong competitive advantage in distribution, can allow investors to sleep well at night.
What a bargain
Although O'Reilly's stock nearly doubled over the last three years, it sells at a P/E ratio of only 21. This is almost half that of the S&P 500, which trades at a P/E of 40, despite O'Reilly significantly outperforming the index in the same time period.
Management has also added $1 billion to its share buyback program, further supporting the stock going forward. O'Reilly may operate in a boring and overlooked industry, but its growth opportunity, resilient business model, and cheap valuation gives investors an easy choice for where to put their new stimulus money.
