O’Reilly Automotive Shifts into High Gear

If you ask an American to name one thing they can’t live without, many will say their car. While some consider their cars to be nothing other than simple transportation, many have a special bond with them. According to a 2019 industry survey conducted by Cars.com, most American automobile owners pay more attention to their cars’ health than they do to their own.

In the past few years, however, more car owners are paying attention to their vehicles out of necessity rather than just love. According to a recent report issued by automotive industry experts S&P Global Mobility, the average car in the US is now more than 13 years old. Older cars require more service — service which frequently entails the purchase of more replacement parts. Additionally, with the average new car purchase price approaching $42,000, current owners are hanging on to their aging cars even longer, a trend which bodes well for continuing demand for used car parts.

Image source: Getty.

Enter O’Reilly Automotive (ORLY 2.46%), one of the largest retailers of automotive parts, supplies, and accessories in the US. O’Reilly opened its first store in 1957 in Springfield, Missouri, and the company has been serving a mix of do-it-yourself (DIY) retail customers and professional service providers for more than 40 years. 

An enviable track record

O’Reilly’s growth strategy can be summed up in two words — consistency and productivity. Over the past twelve years, O’Reilly has expanded its store base by nearly two-thirds, and as of March 2022 the company operated 5,811 stores in the US and 27 stores in Mexico.

In addition to expanding its store base, management has also been able to consistently boost store-level productivity. Same store sales grew 14% in 2021, marking the 29th straight year of comparable store sales growth. Management was able to keep its store productivity streak alive in the the first quarter of 2022, with comparable store sales increasing an additional 5%.

Graph showing comparable store sales have increased since 2017

Chart by author

Total company sales reached $13.3 billion in 2021, up 15% from $11.6 million the prior year. Total sales have grown at an 8.9% CAGR over the past twelve years.

Graph showing store and revenue growth have increased over the past 12 years

Chart by author

Share buybacks supercharge EPS growth

In addition to achieving consistent revenue growth, O’Reilly also has a powerful operating model which generates sizable free cash flow. Management expects the company to generate $1.3 billion to $1.6 billion in free cash flow in 2022. The company has been using this free cash flow to aggressively repurchase stock — it spent $880 million on share repurchases in the first four months of 2022 alone. As a result, EPS growth has exceeded operating profit growth over the past few years and will likely continue to do so going forward.

Safe port in a coming storm?

Concerns about a potential recession have caused investors to sell stocks indiscriminately for most of 2022. Auto parts retailers should be somewhat insulated from broad economic weakness, however, as average cars on the road continue to age and require more frequent repairs. O’Reilly management has driven through inclement weather in the past, and it expects to continue powering forward in 2022 via ongoing same store sales gains and the addition of 175 to 185 new stores.

Investors looking for consistent growth in challenging economic times may find O’Reilly shares an attractive portfolio holding. The company has achieved consistent sales growth in a wide range of past economic conditions and management is currently using substantial free cash flow to aggressively repurchase stock for the benefit of existing shareholders. Given these consistent long term operating trends, patient investors should see attractive long term reward potential in O’Reilly shares going forward. Having seen their shares appreciate more than 750% over the past ten years, long time O’Reilly shareholders are certainly counting their lucky stars.

John Mchugh has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.