Doubling your money in the stock market in five years implies an annualized return of roughly 15%. No matter how you look at it, this type of performance would be exceptional, and it even exceeds the S&P 500's long-term gains of 9% to 10% per annum.
O'Reilly Automotive (ORLY -0.92%), the reliable aftermarket automotive parts retailer, might just be a stock that could grow your money twofold by 2026, and most likely outpace the broader index. Here's why there's a good chance of it happening.
O'Reilly has had great success in the past
Over the past five years, this unstoppable retail stock soared 20% annually. If you bought O'Reilly shares and did absolutely nothing for 60 months, you'd easily look like one of the best investors out there.
The company increased its domestic store count from 4,829 locations at year-end 2016 to 5,811 as of March 31. This expansion strategy resulted in steadily rising sales and profit. From 2016 through 2021, O'Reilly boosted its revenue and net income by 55% and 112%, respectively. What's more, the business consistently produces positive free cash flow.
Probably the most attractive characteristic of O'Reilly's business model is just how durable it is. It doesn't matter if we're in a recessionary period or in a robust economy. The company should do fine regardless. That's because Americans need functioning vehicles to get to work, run errands, or go see loved ones. This underlying theme isn't changing.
Its future look solid
For O'Reilly's stock to double by the end of 2026, the business simply needs to continue its successful track record. This company might not be as sexy as the high-flying tech stocks many investors are attracted to, but it has been flourishing by catering to the needs of both do-it-yourself customers and professional mechanics in the auto parts industry.
Image source: Getty Images.
Consensus Wall Street estimates call for earnings per share (EPS) to grow at a 10% compound annual rate from 2021 through 2026. This means more stores -- of which 53 were opened in the first quarter of 2022 -- should be coming online across the country. Furthermore, expanding into Mexico -- where O'Reilly currently has 27 locations -- is also part of the plan. This should lead to greater sales and net income.
And as I alluded to earlier, producing cash isn't a problem for O'Reilly. After reinvesting for growth, management executes share repurchases as part of the capital-allocation policy. Over the past five years, the outstanding share count has been reduced by an average rate of 6.4% per year, something that could continue in the years ahead.
After falling 11% so far in 2022, O'Reilly's stock is trading at a price-to-earnings (P/E) ratio of just 20, near the low end of where it's been over the past 10 years. For shares to double in five years, the P/E multiple needs to approach 25 -- not a stretch of the imagination for such a dominant business. Even if the stock doesn't fetch this elevated multiple, I think EPS growth could end up being more than 10% per year. To provide context, EPS growth was 24% annually from 2016 to 2021.
As you can see, if O'Reilly simply continues what it has done in the past, even at a slower rate, shareholders should be rewarded.
There is a looming risk
Investors know that there is no sure thing in the stock market, even for a company as reliable and necessary as this one. In O'Reilly's case, the biggest threat on the horizon is the proliferation of electric vehicles (EVs). These cars have advanced technology and engineering, and as a result, repairs and maintenance might only be done by the original manufacturers. A situation like this would significantly hurt the entire aftermarket industry.
However, I believe the U.S. is a long way from this causing a dent in O'Reilly's sales. According to the Department of Transportation, EVs represent just 3% of cars on the road today. It will take a long time for a meaningful portion of the car population to be EVs.
Therefore, O'Reilly is well-positioned to reward shareholders in the years ahead, potentially setting up the stock to double.
