Exceptional Equity Surpassing S&P 500 by Large Margins in the Last Decade: Could It Be an Unmissable Purchase Chance in 2025?
In the last decade, the S&P 500 has impressed investors with an annualized total return of 13.2%, outpacing its long-term average by 3%. Unbelievably, even seemingly uninteresting businesses like O'Reilly Automotive have surpassed this benchmark. This aftermarket auto parts retailer, symbolized by ORLY (1.64%), has seen its shares rise at a compound annual rate of an astounding 20.4% over the past decade.
Is this consumer staples stock a can't-miss buying opportunity in 2025?
Eye-catching qualities
O'Reilly boasts a significant advantage in its size, with trailing-12-month revenue surpassing $16.4 billion. This stature allows it to leverage a robust supply chain, expansive store network, and diverse product availability, providing superior services over smaller competitors.
The company may not be linked to any major secular trends, such as AI, digital advertising, or cloud computing. However, it does benefit from attractive industry tailwinds that favor its long-term outlook.
Firstly, the addressable market for O'Reilly is expanding rapidly. Between 2012 and 2022, the number of registered vehicles in the U.S. skyrocketed by 13.9%. This growth means an increasing pool of vehicles that will inevitably need maintenance in the future, benefiting O'Reilly.
Secondly, vehicle age is gradually increasing. Rather than a liability, this trend is beneficial for O'Reilly. As vehicles age past their original warranty, owners often rely on aftermarket parts suppliers like this retailer.
Moreover, demand for O'Reilly's products is durable, making it a somewhat recession-resistant business. O'Reilly's customer base still requires reliable transportation during challenging economic times, and increased vehicle use during economic prosperity facilitates greater wear and tear on vehicles.
Financial prowess
O'Reilly's durable demand trends have resulted in impressive fundamental performance. In 2023, the company reported a mind-blowing 7.9% year-over-year increase in same-store sales (SSS). Notably, the company has managed to boost SSS for 31 consecutive years, and 2024 looks set to extend the streak to 32.
Despite the numerous obstacles it has faced – including the dot-com bubble, subprime mortgage crisis, Fed taper tantrum, COVID-19 pandemic, and inflationary pressures – O'Reilly's financial performance remains remarkably strong.
The company's operating margin consistently hovers around 20.6%, aided by competitive merchandise costs and unwavering pricing power. Management anticipates generating between $1.8 billion and $2.1 billion in free cash flow in 2024. This substantial surplus will be used to fund new store openings and supply chain upgrades while simultaneously reducing diluted outstanding shares through aggressive stock repurchases (down by almost 4% in the previous 12 months).
Excessive expectations
Given the company's impressive track record, it's no surprise that the stock's valuation has increased. Shares currently trade at a price-to-earnings (P/E) ratio of 29.6. This is a 24% premium compared to the stock's trailing-10-year average and near its historical peak, indicating that the stock's valuation is stretched.
The market's appreciation of O'Reilly's performance is understandable, yet investors must be aware that any future announcements falling short of expectations could cause the stock to plummet swiftly.
Despite its flaws, O'Reilly is undeniably an excellent business. However, investors should probably wait for a dip in the stock price before adding this company to their portfolios in 2025.
Enrichment Data:
Recent Financial Performance
In the fourth quarter of 2024, O'Reilly reported a 4.4% increase in comparable store sales, signifying 32 consecutive years of growth. The company's quarterly sales reached an impressive $4.10 billion, 7% higher than the previous year. Net income dipped slightly to $551 million.
In 2024, O'Reilly achieved a 2.9% increase in comparable store sales. Total sales reached $16.7 billion, and net income reached $2.39 billion. The company successfully opened 198 new stores and relocated its Atlanta distribution center.
Historical Price Performance
O'Reilly Automotive's share price has shown strong upward momentum over the past decade. The stock reached an all-time high closing price of $1334.19 on February 4, 2025. The 52-week high is $1336.63, and the 52-week low is $947.49. In the last 52 weeks, the average stock price has been $1123.58.
Investment Opportunity in 2025
Valuation
The stock's high price-to-earnings ratio indicates O'Reilly is a somewhat expensive option. Despite the expensive valuation, the company's strong performance and growth potential could justify the premium.
Earnings Growth
O'Reilly has managed to grow earnings per share at 19% annually over the past five years, which is lower than the 25% average annual increase in the stock price. This suggests that investors are optimistic about the company's future prospects.
Financial Guidance for 2025
O'Reilly has set guidance for 2025, targeting total revenue between $17.4 billion and $17.7 billion. This represents a moderately increased revenue from the 2024 figure of $16.71 billion.
Share Repurchases
The company has demonstrated a commitment to shareholder value by repurchasing 1.9 million shares for $2.08 billion in 2024. This move continues the trend of purchasing shares to lower the diluted outstanding share count and potentially boost earnings per share.
In light of O'Reilly's strong financial performance and potential industry tailwinds, some investors might consider allocating their investment funds in this direction. To maximize potential gains, it could be strategically beneficial to closely monitor the stock's price movements and consider investing during periods of potential undervaluation.
To effectively manage wealth and potentially increase returns, it's crucial to allocate funds wisely across various asset classes, including stocks like O'Reilly, and diversify investment portfolios accordingly. Thoughtful and prudent investing strategies may help safeguard your money and potentially generate favorable financial outcomes.
