O'Reilly Automotive (ORLY 1.16%) is one of the largest vehicle repair retailers in the United States, selling auto parts, tools, equipment, and accessories. It has grown sales 117-fold since its initial public offering (IPO) in 1993 and would have made a millionaire out of any investor who bought and held $2,500 worth of stock for the next three decades.
Investors might be thinking they have missed their opportunity to take part in this multibagger's incredible run. But the company strikes a balance between returning cash to shareholders and expanding geographically (it now has 6,217 stores) at a highly profitable rate, and after a recent dip, it is as good a time as any to buy shares of this seemingly unstoppable stock.
O'Reilly's growth story is far from over
O'Reilly has a roughly 50-50 split between sales to do-it-yourself (DIY) and professional mechanics, allowing it to expand into any market across the United States. New stores can succeed whether they are in small towns, where almost all of their sales are for DIY repairs, or in a major metropolis, where professional services are more common.
Even though the chain has opened at least 149 stores every year since 2005, it might be one of the most underappreciated growth stories on the market. And ample room for growth remains.
For example, as of August 2022, the company had no stores in New York State; today, it has 31. A look at other heavily populated states like Texas (831 stores), California (539), and Florida (290) clearly shows the opportunity for further expansion in New York.
And the company has only one store in Maryland and none in New Jersey and Delaware, leaving a long growth runway in the Northeast.
Meanwhile, O'Reilly is in the early stages of expansion into Canada and Mexico by acquiring 21 stores from Mexico-based Mayasa Auto Parts in 2019 and 23 locations from Canadian company Vast-Auto in 2024. This might be setting the stage for its next decade of growth for investors.
Mexico in particular looks like an immense opportunity after O'Reilly opened its first new distribution center in Guadalajara last summer, paving the way for a step-up in expansion plans in the country. What makes Mexico particularly interesting is that the average age of a vehicle there is more than 16 years, compared to 12.5 here in the U.S., making it a natural fit for an auto parts retailer.
Image Source: Getty Images.
Generating top-tier returns from its growth
What makes these ambitious growth plans all the more exciting for investors is that O'Reilly has a long history of delivering robust return on invested capital (ROIC).
ORLY return on invested capital; data by YCharts.
O'Reilly's high ROIC signals that it generates outsize profitability compared to its debt and equity. Put simply, the company is masterful at expanding in a highly profitable manner.
Currently, the company's ROIC is good for fourth place among peers in the S&P 500 index, which is a promising sign for investors as stocks that outscore their peers in ROIC have historically outperformed.
This high ROIC, paired with previous expansion across the U.S., shows how the company has delivered such amazing returns over the last three decades. More importantly, it hints at how the company could keep doing so over the next 30 years in the Northeast, Mexico, and Canada.
O'Reilly: A buyback juggernaut
Besides self-funding its growth, O'Reilly generally has a ton of free cash flow (FCF) left over, and it loves to return it to shareholders through stock buybacks. Over the last decade, the company has bought back 6% of its outstanding shares each year, leading to a 44% drop over that time.
ORLY shares outstanding; data by YCharts.
When done correctly -- as O'Reilly has -- share repurchase programs greatly increase the value of an investors' shares. Consider the following chart:
ORLY net income (TTM); data by YCharts. TTM = trailing 12 months.
While O'Reilly's more than tripling of its net income in a decade is impressive enough, the company was able to grow its earnings per share (EPS) nearly sixfold thanks to its 44% lower share count.
But despite the company's history of steady share repurchases, its strong ROIC, and the growth remaining ahead of it, O'Reilly trades at 25 times earnings, the same as the S&P 500's average.
Down 15% from its 2024 highs and trading at this market-average valuation, O'Reilly stock looks like a best-in-class company to buy and hold forever.
