This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!

About O’Reilly

First and foremost, we have previously written an in-depth stock analysis article on one of O’Reilly Auto Parts’ largest, most threatening competitors. 

Secondly, Springfield, Missouri-headquartered O’Reilly Auto Parts is essentially the same as its aforementioned foe, Tennessee-based AutoZone, as it supplies what are termed as aftermarket auto parts such as critical components related to one’s brakes, batteries, oil, wipers, engine overall and just so many other categories through its more than 5,000 physical store locations.

In the context of O’Reilly and AutoZone, aftermarket auto parts are simply parts that are supplied to aid one’s vehicle in the long run, replacing the originally supplied part or piece of equipment from the vehicle’s manufacturer and replacing it with a new one which is supplied by who else by O’Reilly Auto Parts and its competition.

This company can be best thought of as, at least from our lens, a major player in the automotive retail industry.

As it measures up against its largest competitor, O’Reilly is really similar to AutoZone and some other larger automotive retailers in that it sells many of the same types of parts in similar geographies throughout the United States, however, one of O’Reilly’s major differentiators is their jingle.

In all seriousness, O’Reilly does apparently have less stores than AutoZone as well as the fact that it apparently has a wider assortment of parts, however, they also reportedly tend to be more expensive than AutoZone’s.

Again, however, when it comes to the services and products offered by O’Reilly, all things considered they are quite similar to those of the competition as, really, a car is a car at the end of the day and it needs certain specific components to continue properly functioning, most of which are offered by these two companies.

O’Reilly and AutoZone can sort of be seen as Mastercard and Visa in that they both provide essentially the same core services but the way in which they sell or offer their products may be different  and they both own a considerable portion of their respective industry.

However, let’s shift the spotlight back onto O’Reilly Automotive and gain some further familiarity with its core financial figures so as to ultimately devise an opinion as to whether or not its stock (NASDAQ: ORLY) is worth considering an investment in today.

O’Reilly’s stock financials

O’Reilly Auto Parts is a $55.95 billion company (according to its current market capitalization) with a prevailing share price of $919.02, a price-to-earnings (P/E) ratio of 26.8 and not an annually distributed dividend in sight.

First of all, we completely understand not offering a consistent annual dividend in this business, as there are a multitude of costs that can and do fluctuate as well as the fact that even though this is a mature business in a relatively mature sector of the global economy, O’Reilly is still growing and with that, continuously plotting and building new stores across the United States, which evidently requires readily available capital in order to put its money where its growth prospects are.

Thus, we take no issue and think it’s the right way to go for this company, not to mention the fact that AutoZone also doesn’t dish out an annual dividend.

Strolling over to the company’s balance sheet, O’Reilly’s executive team is tasked with tending to and managing approximately $12.6 billion in terms of total assets as well as around $13.7 billion in terms of total liabilities, which usually would scares a little bit, however, being that this company is known for having a broad assortment of parts and other items of inventory, it doesn’t really scares us all that much, as AutoZone is also apparently total liability-heavy to a very similar, small degree.

With respect to the company’s income statement, O’Reilly’s total annual revenues since 2018 have been steadily growing year-over-year (YOY), starting at around $9.5 billion, rising the following year to $10.1 billion, the next to $11.6 billion, $13.3 billion in 2021, leading up to its latest reported figure displayed on TD Ameritrade’s platform of $14.4 billion, in 2022.

This gradual yet noticeable rise in total annual revenues can likely be attributed to a few things including (but not limited to) growth in physical store locations across the United States along with meaningful price hikes in more recent years due to inflation and supply chain-related pressures and perhaps a wider and deeper assortment of parts that O’Reilly is offering its customer across the nation.

Or a combination of all of these catalysts and more.

Regardless, we were happy to find O’Reilly’s total annual revenues (since 2018) rising at such a brisk pace amidst the recent and current economic turmoil.

Onto the company’s cash flow statement it can be seen that both O’Reilly’s net income and total cash from operations have been positive and consistent, which hints at the fact that this company might just have a very strong trailing twelve month (TTM) net profit margin as well as the fact that this company runs a very predictable business or at least operates in a predictable industry.

Let’s see if we are onto something here.

O’Reilly’s stock fundamentals 

As displayed on TD Ameritrade’s platform, O’Reilly’s TTM net profit margin is listed as 14.89% to the industry’s listed average of 8.03%, which, in such a competitive industry is fairly impressive to us and speaks to the company’s success in having a wider net of products offered to its customers.

This is plainly a great sign.

Now, with regard to the company’s TTM returns on assets and investment(s), O’Reilly’s both also trump the industry’s respective averages.

For instance, also according to TD Ameritrade’s platform, O’Reilly’s TTM return on its investments stands at 39.4% to the industry’s average of 24.39%, which is certainly a notable difference and some meaningful separation between itself and the average of its peers.

A consideration for O’Reilly

One of O’Reilly’s other prominent competitors, Raleigh, North Carolina-headquartered Advance Auto Parts (AAP) has had a stretch of resoundingly negative earnings calls, shoving its share price (NYSE: AAP) down almost 60% (at the time of the writing of this article) over the last year’s span of time due to missing profit expectations (among a few other things that can be adjusted, we think, in the intermediate and long runs) and given this recent considerable share price drop, we think there’s an opportunity for O’Reilly to capitalize and gain yet another edge against AutoZone.

The fact of the matter is Advance Auto Parts has shredded some of its market capitalization off of its top and it has become a lot cheaper of a company for O’Reilly to consider wholly acquiring. 

Make no mistake about it, if this hypothetical acquisition were to actually be pursued by O’Reilly, it would certainly receive copious amounts of regulatory scrutiny (particularly by the Federal Trade Commission and Department of Justice) which could absolutely jeopardize the completion of such a deal.

Nevertheless, we don’t think (from what we have observed so far, at least) that it would be a bad idea for O’Reilly to consider shelling out a few billion dollars in taking out Advance Auto Parts and integrating it and its competitive advantages into a stronger conglomerate following the completion of such an acquisition.

Should you buy O’Reilly stock?

Even if such an acquisition isn’t pursued, O’Reilly has its financial ducks in a row.

For instance, its balance sheet is in fine, competitive condition (so much so that it could likely afford to tack on a manageable, of course, amount of debt to complete a billion dollar acquisition of AAP, if it was compelled to pursue such a deal) its recent total annual revenues have been tracking up at a nice rate, its cash flows are incredibly strong, it’s a staple in the aftermarket auto parts corner of the world and there aren’t really any signs of this company slowing down.

Keeping all of these positives in mind, it should still be observed that this company’s share price is trading on the more expensive side at the moment, specifically given that its prevailing price-to-earnings ratio is a bit above that of the previously mentioned fair value benchmark and even though there is certainly some growth behind this company, it is nevertheless a mature business in a mature industry and we have our suspicions regarding the deepening of the current recession and how it will negatively impact O’Reilly and its peers in the short run and we just don’t feel like overpaying right now.

While we will certainly be looking for an opportunity to get into this company’s stock (NASDAQ: ORLY) during or following the current recession, it’s just a tad too expensive right now.

We give the company’s stock a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.