O’Reilly is also looking to bolster its presence in the higher margin do-it-yourself market further through initiatives such as a new loyalty card program. Also, the company has been rolling out its B2B platform so as to satisfy customers’ requirement in a more efficient manner. All these initiatives should lead to both top line and bottom line growth going forward, while an impressive share repurchase program should aid earnings growth further.
O’Reilly recently increased its share repurchase authorization by $500 million, taking the total authorization to $3.5 billion. The company believes in returning cash to shareholders through repurchases and uses excess cash for the purpose, and I think that this is the right way to go.
A premium stock
However, one point of contention which might stick out is that O’Reilly is expensively valued as compared to peers and also the fact that it’s trading near its 52-week high. A trailing earnings multiple of 22.5 times looks expensive when stacked against Advance Auto Parts, Inc. (NYSE:AAP)’s and AutoZone, Inc. (NYSE:AZO)’s 16 times. But then, none of the other two have been in green territory as far as same-store sales are concerned and as such, O’Reilly deserves the premium valuation.
AutoZone, Inc. (NYSE:AZO)’s same-store sales had dropped 0.1% in the previous quarter but revenue and earnings were up 4.5% and 7%, respectively. In comparison, O’Reilly delivered 1.9% same-store sales growth (adjusted for Leap Day last year), revenue growth of 4% and earnings growth of 19%. Moreover, AutoZone, Inc. (NYSE:AZO)’s huge debt load of $4 billion is something which investors should worry about, and this further makes O’Reilly more attractive since its debt is just $1.1 billion and it has ample cash flow to deal with it.
However, Advance Auto Parts, Inc. (NYSE:AAP) might prove to be a good choice as well, and could provide some tough competition to O’Reilly as it’s been rapidly growing its business by aggressively building stores and making acquisitions.
However, the company had witnessed a 9% decline in profit and 3.2% decline in same-store sales in its previous quarter due to various factors. Thus, when you’re getting a company which is delivering growth and value to shareholders in the form of O’Reilly, I think it would be more prudent to go with it rather than considering the others.
The bottom line
Considering all these factors, O’Reilly’s premium valuation is justified and I believe that it is the stock to pick in this industry right now. Going forward, analysts expect the company to grow its earnings at 16% for the next five years, at par with the industry average, but I won’t be surprised if O’Reilly keeps outperforming the industry like it has done so far.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of O’Reilly Automotive. Harsh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article A Few Reasons Why This Stock’s Premium Valuation Is Justified originally appeared on Fool.com is written by Harsh Chauhan.
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