O’Reilly Automotive, Inc. (ORLY) has been at the center of speculation amid the clean energy wave. This has caused its stock to decline 5.3% over the past month. Because  traditional internal combustion vehicles are expected to be phased out (or close to it) by the next decade, the demand for aftermarket products catering to these automobiles is expected to decline.

While this outlook holds some truth, given the global and domestic policies banning the sale of internal combustion powered vehicles in the foreseeable future, these vehicles still account for most of the automobile industry. Also, the relatively relaxed time frame for this industry-shaking changeover affords ORLY ample time to reorganize its operations to accommodate the emerging trend.

With the social distancing curbing the demand for public transportation, people have been increasingly relying on personal vehicles to commute and for their miscellaneous transportation needs. Moreover, ORLY has demonstrated business resiliency over the past year. Rising sales of second-hand cars have boosted the aftermarkets, helping RLY to a 16.7% surge in price over the past year.

Here is what I think could shape ORLY’s performance in the upcoming months:

Almost Recession Proof Business Model

ORLY’s operations were temporarily affected during the initial stages of complete coronavirus lockdown last March. However, the company recuperated quickly  as people turned smartly to private vehicles for mobility in lieu of public transport. Also, with increased spare time, the demand for car parts and other products among e do-it-yourself customers has risen.

While the economy is currently still recovering from the pandemic-driven recession, the new-vehicle  market is expected to witness depressed demand given still high unemployment levels and conservative consumer spending. Basically,  people have been sticking with  their old vehicles or purchasing secondhand ones; either course  bodes well for aftermarket supplier ORLY.

Robust Financials

ORLY has maintained its  growth streak over the past three years, irrespective of market fluctuations and the pandemic-driven recession. The company’s revenues have increased at a CAGR of 8.2% over the past three years, while its EBITDA rose at a CAGR of 10.3% over this period. Its net income and EPS grew at CAGRs of 16.1% and 24%, respectively, over the past three years. And its leveraged free cash flow increased at a CAGR of 25.9% over this period.

ORLY has generated $11.26 billion in revenues over the past year. Its trailing 12-month EPS is $22.34. The  company surpassed consensus EPS estimates in three of the trailing four quarters.

Explosive Returns on Investment

ORLY’s fundamental strength and sturdy financials have allowed it to emerge as one of the most profitable stocks among its peers. Its trailing 12-month gross profit margin of 52.74% compares to the industry average of 33.6%. And its trailing 12-month EBIT margin of 20.68% is 273.5% higher than the industry average of 5.54%. Its trailing 12-month net income margin and leverage free cash flow margin of 14.96% and 13.58%, respectively,  have beaten  industry averages of 2.14% and 7.58%, respectively.

ORLY’s return on total capital and return on total assets of 22.2% and 13.47% compare favorably with respective industry averages also.

Analyst Sentiment and Price Target Indicate Potential Upside

Analysts expect ORLY to hit $536.33 in the near term, reflecting a potential upside of 19.6%. Of 23 Wall Street analysts that rated the stock, 6 rated it Strong Buy and 9 rated it Buy.

POWR Ratings Show Promise

ORLY has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system evaluates each stock on a total of eight  different categories. ORLY  has a grade of A for Quality, which is justified given the company’s robust profitability. It has a grade of B for Momentum and Sentiment. The stock enjoys favorable analyst sentiment; consensus EPS and revenue estimates indicate year-over-year growth. Analysts expect the company’s EPS and revenues to increase 25.7% and 10.1%, respectively, year-over-year for  the current quarter ending March 31, 2021.

ORLY is ranked #21 of 68 stocks in the Auto Parts industry. In addition to the grades I have highlighted, you can check out additional ratings for Growth, Value and Sentiment here.

Check out other popular stocks in the Auto Parts industry having an overall rating of A or B here.

Bottom Line

The current macroeconomic outlook suggests  that the demand for auto parts will likely rise soon. Based on ORLY’s leading position in the industry, we expect the company  to capitalize on this opportunity, leading to higher profits.

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ORLY shares were trading at $453.34 per share on Tuesday afternoon, up $0.84 (+0.19%). Year-to-date, ORLY has gained 0.17%, versus a 4.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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