Doubling your money in the stock market in five years means an annual return of about 15%. However you look at it, this kind of performance would be exceptional, and it even surpasses the S&P 500long-term profit of 9% to 10% per year.
O’Reilly Automotive (ORLY 0.80%†the reliable aftermarket car parts retailer, could just be a stock that could double your money by 2026, most likely outperform the broader index. This is why there is a good chance it will happen.
O’Reilly has had great success in the past
Over the past five years, this unstoppable retail inventory has grown by 20% annually. If you bought O’Reilly stock and did nothing for 60 months, you could easily look like one of the best investors out there.
The company increased the number of domestic stores from 4,829 locations at year-end 2016 to 5,811 as of March 31. This expansion strategy resulted in a steadily increasing turnover and profit. From 2016 to 2021, O’Reilly increased its sales and net income by 55% and 112%, respectively. In addition, the company consistently produces positive free cash flow†
Probably the most appealing feature of O’Reilly’s business model is how sustainable it is. It does not matter whether we are in a recession period or in a robust economy. Either way, the company should be doing well. That’s because Americans need functioning vehicles to get to work, run errands, or visit loved ones. This underlying theme does not change.
The future looks solid
To double O’Reilly’s stock by the end of 2026, the company simply needs to continue its successful track record. This company may not be as sexy as the high flyers technical stocks attracts many investors, but it thrives by meeting the needs of both DIY customers and professional mechanics in the auto parts industry.
Wall Street estimates that earnings per share (EPS) should grow by 10% annually between 2021 and 2026. This means more stores — 53 of which opened in the first quarter of 2022 — should come online across the country. In addition, expansion into Mexico – where O’Reilly currently has 27 locations – is also part of the plan. This should lead to more turnover and net income.
And as I mentioned before, producing cash is no problem for O’Reilly. After reinvesting for growth, management conducts share buybacks as part of the capital allocation policy. Over the past five years, the number of outstanding shares has been reduced by an average of 6.4% per year, something that could continue in the coming years.
After falling 11% so far in 2022, O’Reilly’s stock is trading at a price-to-earnings ratio (P/E) of just 20, near its lowest point in the past 10 years. For the stock to double in five years, the P/E multiple has to approach 25 – not much fantasy for such a dominant company. Even if the stock doesn’t reach this high multiple, I think the growth in earnings per share could reach more than 10% per year. To provide context, EPS growth was 24% annually from 2016 to 2021.
As you can see, if O’Reilly just continues what it has done in the past, even at a slower pace, shareholders should be rewarded†
There is an imminent risk
Investors know that there is no security in the stock market, even for a company as reliable and necessary as this one. In O’Reilly’s case, the biggest threat on the horizon is the proliferation of electric vehicles (EVs). These cars have advanced technology and engineering, so repairs and maintenance may only be performed by the original manufacturers. A situation like this would significantly harm the entire aftermarket industry.
However, I believe the US is still a long way from this and is putting a dent in O’Reilly’s sales. According to the Department of Transportation, electric vehicles currently represent only 3% of cars on the road. It will be a long time before a significant portion of the car population is electric.
Therefore, O’Reilly is well positioned to reward shareholders in the coming years, potentially doubling its share.
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