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Down 13%, is this magnificent stock a once-in-a-generation investment opportunity?
Investors should understand that some of the best historically performing stocks can come from all different sectors. O’Reilly Automotive (NASDAQ: ORLY) proves this.
In the last decade, this boring retail stock increased by 581%. This gain is well ahead of the 224% total return of S&P 500 index.
But more recently, it has been a story of pessimism. O’Reilly shares are currently 13% below their all-time high (as of May 3), which was reached a few weeks ago in late March.
Does this make the stock a unique buying opportunity on the dip?
Focus on the big picture
O’Reilly released its Q1 2024 financial results on April 24, and it appears the market wasn’t too pleased with the results. Revenue increased 7% year over year to $4 billion. And diluted earnings per share of $9.20 represented a gain of 11%. These two key numbers fell short of Wall Street’s expectations, causing shares to fall following the announcement.
It’s very easy for investors to get carried away by the financial results of a single quarter. That could be the case for O’Reilly. His most recent numbers were still solid, in my opinion. However, investors should always stay focused on the bigger picture.
O’Reilly is a truly wonderful business. One reason is that it experiences durable demand that is not as sensitive to macroeconomic factors. People always need their cars for work, so they can go to the office, run errands, or pick up the kids from school. This reality does not change.
This business has benefited and will continue to benefit from long-standing industry tailwinds that should support demand for some time. The average age of a car on the road in the U.S. is steadily increasing every year; It is now about 12:5 pm. This is an important trend to pay attention to.
The typical manufacturer’s warranty lasts three to five years. Because cars last much longer, they spend more time out of warranty. This is the sweet spot for O’Reilly as it sells a wide range of parts and supplies to keep vehicles running longer.
Another positive factor is the simple fact that more miles are driven in the US each year. To be clear, the number increases by about 1% annually. But, as a whole, this leads to greater wear and tear on vehicles. Once again, this trend supports the demand for a company like O’Reilly.
O’Reilly Finance
Despite what recent stock performance may indicate, O’Reilly is an extremely profitable company. In the last quarter, the company recorded a gross margin of 51.2% and an operating margin of 18.9%, showing how much revenue reaches the financial results.
The story continues
O’Reilly’s management team prioritizes investing in growth opportunities, mainly focused on opening new stores. Even so, the company still collects considerable amounts of free cash flow (FCF), totaling $2 billion in 2023. Executives reiterated their FCF guidance for this year, expecting to generate between $1.8 billion and dollars and 2.1 billion dollars.
This financial windfall supports ongoing share repurchases. The number of O’Reilly shares outstanding has been reduced by 5% in the last 12 months alone.
Consider the assessment
Now that shares are down double digits from their peak price, investors have a more attractive buying opportunity. The stock trades at a P/E ratio of 25.8. While that’s lower than the stock’s multiple of 30.3 at the end of March, it’s still above the past five-year average of 23.
I still believe that O’Reilly stock is now more reasonably valued. But from a historical perspective, they trade at a slight premium. I wouldn’t say the stock is a one-and-done opportunity here, but it should be an opportunity that you consider adding to your portfolio today.
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Neil Patel and its clients do not have a 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.
Down 13%, is this magnificent stock a once-in-a-generation investment opportunity? was originally published by The Motley Fool