This Is One of the Top Performing Stocks of the Last Decade?

Posted: Apr 22, 2016 12:01 AM
This Is One of the Top Performing Stocks of the Last Decade?

O’Reilly Automotive (ORLY) is an auto parts retailer, competing with other auto parts stores like AutoZone (AZO), Advance Auto Parts (AAP), Genuine Parts (GPC), and The Pep Boys. O’Reilly has 4,465 stores in 43 states which makes its footprint slightly smaller than AutoZone (the largest retailer) and Advanced Auto Parts.

Recently there has been M&A in the sector as Icahn Enterprises (IEP) closed an acquisition of The Pep Boys in February after a bidding war with Bridgestone. Its store base of only 800 stores is much smaller than O’Reilly’s. Genuine Parts has also been acquisitive, acquiring Olympus Imported Parts in February and closing two other deals in March.

Source: O’Reilly as of 8/11/15

Despite record new car sales over the last few years, the installed base of automobiles in the U.S. has continued to age. Research firm IHS Automotive predicts that the age of the average car and light truck is expected to rise to 11.6 years in 2016. This implies that people are not scrapping their old vehicles which is a positive for the Auto Parts Retail sector which focuses on supplying parts for used vehicles.

Another favorable trend besides record auto sales driving revenue in the auto parts retail segment has been low gas prices. Low gasoline prices mean more driving, which in turn means more vehicle maintenance and repairs.

Relative to its competition O’Reilly has been gaining market share and posting strong same-store comps thanks to better execution and its specialized offerings. Advance Auto Parts and Genuine Parts have been slowed down by execution issues as they struggle to integrate recent acquisitions.

Furthermore, O’Reilly caters more to professional service providers (PSPs) than its competition, comprising 42% of its sales. O’Reilly has over 650 full-time sales staff dedicated to servicing PSP customers offering enhanced services such as 1) used oil, oil filter and battery recycling, 2) battery, wiper and bulb replacement, 3) battery diagnostic testing, 4) electrical and module testing, 5) loaner tool program and 6) professional paint shop mixing.

The company reported strong results in February, beating street earnings estimates by $0.12, up an impressive 24% year-over-year. These results extended it earnings beat streak to 18! The company also beat on revenues and guided up both earnings and sales. And it authorized another $750 million in share repurchases. Understandably the stock traded up nicely on the results.

I know that an Auto parts retailer is not quite a sexy as a biotech or tech stock, but O’Reilly has been a great growth story! Let’s take a closer look!

Source: Best Stocks Now App

O’Reilly Automotive is one of a handful of stocks that rates as a Gunderson Trophy Winner for its consistent long-term outperformance. With a market cap of $26.2 billion it falls in the Large Cap category and has a Moderate Risk profile.

Source: Best Stocks Now App

On a Valuation basis, the stock has a forward PE ratio of 22 which is not bad considering its past 5-year annual growth rate of 25% and expected future growth rate of 16% per year. The stock does not currently pay a dividend and receives a Value Grade of B. My five year target price suggest upside potential of over 80% that same period of time.

Source: Best Stocks Now App

Now we take a look at the sensational performance of the shares over the years.

Over the last 10 years, O’Reilly Automotive has delivered an average annual return of 22.6%. This compares with a market returns of just 5% per year.

The last five years has been even better. The shares have an annualized returns of 37% per year vs. 9.6% for the market.

The beat goes on also over the last three years. Once again the stock has clobbered the returns of the market.

And what have the shares done for investors lately? They have returned 22.6% over the last twelve months vs. just 5% for the S&P 500.

When I compare the long, intermediate, and short term returns of the ORLY agains the other 4,118 stocks, mutual funds, and exchange trade funds in my Best Stocks Now database, O’Reilly gets a Performance Grade of A.

It’s current momentum grade is just B- however.

Source: Best Stocks Now App

I like to combine value with performance. Value by itself produces too many value traps and performance by itself can produce too many overvalued stocks that eventual crash and burn.

When my proprietary formula of value and performance is applied toO’Reilly stock, receives an overall Stock Grade of B+.

But more importantly than that, out the stock currently ranks at #214 out the more than 4,000 assets that I track.

O’Reilly is the perfect example of a stock I originally discovered using my app. Who knew that a retailer of boring things like brake fluid and car air fresheners would be such a top-performer over the years?

Based on current favorable characteristics such as its strong competitive position, higher margin enhanced service offerings, positive auto trends, and an aging car population, O’Reilly appears poised to continue its strong record of performance and keep motoring along.

Gunderson Capital Management is currently long the shares.