Often, the best investments come from stable and sleepy companies that attract the least amount of attention. Sure, disruptive technologies and visionary CEOs are great, but stocks with these characteristics need a lot to go right in the future to justify investing in them. Instead, you might want to look at this top auto company, a proven market winner that just reported another stellar quarter.
Let's take a look at one of my favorite stocks right now. Hint: it's not Ford, Tesla, or Uber.
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Cruise control
O'Reilly Automotive (ORLY 0.05%) reported its third-quarter financial results on Oct. 27, and it was another great showing by the aftermarket auto parts retailer. Revenue of $3.5 billion (up 8.5% year over year) and diluted earnings per share of $8.07 (up 14.1%) were both records. Same-store sales, also known as comps, one of most important metrics for a brick-and-mortar retail business, rose 6.7% after soaring 16.9% in Q3 2020.
During the three-month period, O'Reilly opened 30 net new stores, bringing the year-to-date total to 146. After opening 170 (at the midpoint) net new locations in 2021, the leadership team expects 180 (at the midpoint) to be opened in 2022, higher than the previous guidance. What's more, they raised full-year 2021 comps guidance to an increase of 10% to 12%.
As part of its ongoing share repurchase program, management bought back $943 million worth of stock in the third quarter. A clear sign of their belief that O'Reilly's shares are undervalued, this equates to 2.2% of the market capitalization (as of Monday, Nov. 8). That's pretty incredible for just one quarter. And since the buyback program was introduced in January 2011, a whopping 85.1 million shares have been repurchased. O'Reilly has just under 70 million shares outstanding today.
An all-weather performer
What makes O'Reilly a special company is its all-weather appeal. In recessionary times, consumers hold off on purchasing new cars, opting instead to try to extend the life of their existing vehicles. In 2008 and 2009, O'Reilly's sales skyrocketed 41.8% and 35.5%, respectively.
And when the economy is booming, kind of like it is today, people tend to drive more. This increases the wear and tear on cars, again supporting demand for the products O'Reilly sells. Revenue has increased at a compound annual growth rate of 7.9% from 2010 through 2020.
After declining for 12 consecutive months as a direct result of reduced consumer mobility due to the pandemic, August was the sixth straight month that miles driven in the U.S. registered a year-over-year gain. O'Reilly's business will benefit nicely if this trend continues.
What about electric vehicles?
If you bought stock in O'Reilly a decade ago, I applaud you. As of Nov. 8, you'd be sitting on an extraordinary gain of greater than 700%. There's really no reason to think that the company's success won't continue in the years ahead. The bear case for this business, though, is that as electric vehicles take over, O'Reilly will slowly become obsolete as a result of these innovative cars' fewer parts and the complex engineering that only an original manufacturer can handle. But the trend of cars failing less often and becoming more expensive to repair, particularly on the DIY side, has been happening for a while. And O'Reilly has been able to handle this shift, mitigating the risk somewhat.
While electric vehicles are having their moment in the spotlight, they still only accounted for roughly 3% of domestic new car sales in 2020. Therefore, it'll be a long time until the majority of automobiles you see on the road are electric. In the meantime, O'Reilly will continue serving its customers' repair needs like it always has: in an efficient, reliable, and timely manner.
Investors should seriously consider buying shares in this boring, predictable, and market-crushing stock.
