Stock Analysis & Ideas

O’Reilly Automotive Could Benefit from Inflation

O’Reilly Automotive (ORLY) is a retailer of automotive parts operating in the U.S. The current inflation rate in the U.S. is over 7%, and this has sent shock waves through the market thus far in 2022. All three major indices are down on the year, with the Nasdaq taking the brunt of the downturn. Investors will often turn towards more defensive stocks for safety in uncertain investing markets. There are multiple reasons that O’Reilly could make gains, given the current conditions.

Macroeconomic Tailwinds

The most concerning current issue in the market is inflation. When inflation rises, the Federal Reserve is compelled to raise interest rates to slow it down. This discounts the value of companies’ future cash flows, making them less valuable to Wall Street.

This especially hits growth stocks whose profits are expected to come in future years. Investors will look to value stocks with quality earnings during these times, and O’Reilly is one of these. The company earned $31.10 per diluted share for the Fiscal Year 2021.

Inflation has also hit the automobile market – hard. There are stories every day of dealers selling cars above the sticker price. One reason for this is the well-publicized shortage of semiconductors, or chips, due to supply-chain issues. Auto manufacturers can’t source enough chips, and dealers are short on vehicles. Since the demand is outpacing the supply, prices are rising rapidly.

Another recent supply headwind has been the disruption of the flow of goods over the Ambassador Bridge due to protests. The Ambassador Bridge is relied upon by many automakers to receive parts, and both Ford and General Motors were forced to slow production as a result. This appears to be a short-term issue; however, it comes at an inopportune time for the automakers.

This combination of factors pushes many people to hold on to their current vehicles longer. As these cars age, they will need more parts, and this is where O’Reilly can benefit from the current market conditions. According to CNBC, the average age of an automobile is now 12.1 years. This is up from 11.9 years in 2020 and 9.6 years in 2002.

2021 Results Were Impressive

O’Reilly posted impressive results in Fiscal 2021. The company reported sales of $13.3 billion, a 15% increase over the $11.6 billion earned in 2020. Even better, the top-line number was not just the result of rising prices. Gross profit also increased 15.3% over 2020.

Management has also done a terrific job of controlling costs. Net income reached $2.2 billion in 2021, an increase of 24% over the prior year. In Fiscal 2020, the company earned $23.53 per diluted share. This increased to $31.10 per diluted share in 2021.

Diluted earnings per share have been consistently rising for many years. The company is currently trading at a price-to-earnings ratio under 22, which is reasonable for a highly-profitable and growing company.

Wall Street’s Take

Turning to Wall Street, analysts are bullish on O’Reilly Auto’s stock, with a Moderate Buy consensus rating. This consensus is based on eight Buys, six Holds, and no Sell ratings. The lack of Sell ratings suggests a measure of safety in the current market.

The average O’Reilly Automotive price target of $752.08 implies 10.5% upside potential.

The Conditions Are Right for O’Reilly

O’Reilly is performing at a high level. Sales and net income are rising, and the company recently released extremely impressive results for 2021. Meanwhile, the automobile industry faces multiple headwinds that have led to runaway inflation.

Because of this, Americans are keeping their vehicles longer, and these vehicles will continue to drive the demand for parts. It all adds up to bullish conditions for O’Reilly Automotive stock.

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