Since August 2019, the S&P 500 has produced a total return of 97%. This is much better than the broad index's historical annualized gain of roughly 10%.
But there's one phenomenal retail stock that has crushed the S&P 500. In the past five years, it has soared 202% (as of Aug. 7), a fantastic gain that would've tripled an investor's capital.
Continue reading to learn more about this stellar business that you might not already be familiar with.
Boring is beautiful
The company in question is not a high-flying tech enterprise. In fact, it might be the furthest thing from the ongoing artificial intelligence boom. I'm talking about O'Reilly Automotive (NASDAQ: ORLY) , the nationwide aftermarket auto parts retailer. Through its network of 6,244 stores (of which 6,152 are in the U.S.), the business sells things like brakes, batteries, motor oil, and wiper blades to both DIY customers and professional auto mechanics.
To be clear, this is a very boring company. But that's what makes it special. Unlike many tech businesses, O'Reilly doesn't attract much in the way of innovation or disruption. And this adds to its durability, as there isn't a lot of start-up capital or entrepreneurship activity trying to upend the industry.
O'Reilly's success stems from some key competitive strengths. Compared to smaller peers, like independent hardware stores or auto parts chains that have far fewer locations, O'Reilly has the brand recognition to stand out. Plus, with a nationwide store footprint that's supported by numerous distribution centers, this company has unmatched inventory availability. Customers can rest assured knowing that O'Reilly likely carries the product that they need, so that they can get their car up and running.
Driving up the valuation multiple
Shares of O'Reilly Automotive have risen over 200% in the past five years partly due to impressive financial performance. Between 2018 and 2023, revenue increased at a compound annual rate of 10.7%. In fact, there was no year that sales growth dipped below 6.4%. Even in 2020, when the COVID-19 pandemic rattled the economy, O'Reilly posted a 14.3% revenue gain.
And in the current year, the business is projected to increase same-store sales by 3% (at the midpoint). This would mark the 32nd straight fiscal year that a gain in this key metric was registered. Every retail business dreams of this kind of outstanding track record, which indicates steady performance regardless of macroeconomic conditions.
O'Reilly is extremely profitable. In the past five years, its gross margin has averaged 52%, while the operating margin has averaged 20%. Unsurprisingly, this has resulted in the generation of lots of free cash flow, to the tune of an estimated $1.8 billion to $2.1 billion in 2024.
In the past, management has aggressively repurchased shares as a way to return capital to investors. Since Q2 2014, a decade ago, tens of billions of dollars have been spent on buybacks. This favorable capital allocation policy helped reduce the outstanding share count by 45%. Consequently, O'Reilly's earnings per share (EPS) have skyrocketed.
When a business consistently reports robust revenue and EPS growth, the market will naturally take notice. This increasing optimism by investors also helped drive up O'Reilly's valuation. Five years ago, the stock traded at a price-to-earnings ratio of 22.3. Today, that valuation multiple sits at 28.4. Clearly, the fact that this is a high-quality company is no longer a secret.
Based on its history, it's probably accurate to say that O'Reilly is on the more expensive side. I'd expect lower returns going forward. But the business is still worthy of investment consideration.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
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