The Buyback Premium Portfolio is beating the S&P 500 by more than 242% since its inception back in August of 2000; our latest addition is O’Reilly Automotive, Inc. (ORLY), notes David Fried, editor of The Buyback Letter.

We last bought O’Reilly back in May, and sold a few months later in July, for a 2.85% gain. It’s floated to the top of our filters again. The company is a leading retailer in the automotive aftermarket industry, based in Springfield, Michigan.

It has a balance of DIY (do it yourself) and DIFM (do it for me) business, with products for domestic and imported cars, vans and trucks. Its retail footprint is 5,732 stores, with some 77,000 employees. It opened 156 net new stores in 2020, and has plans to open roughly 170 this year. It’s also expanding into Mexico, where it now has 22 locations.

There are a number of economic and behavioral factors that speak well for O’Reilly:

  • With new cars hard to get, used car prices are soaring and so is demand for parts to keep them running tip top.
  • As the U.S. continues to attempt to recover from the pandemic (yet is still fighting the Delta and other emerging variants), auto parts retailers are looking attractive.

Mobility increases nationwide as people get vaccinated, and they want to travel. The total mileage driven by drivers is starting to pick up as people begin to come out of 1.5 years of hibernation.

  • Cars need non-discretionary maintenance, and retailers such as O’Reilly can pass along whatever costs of inflation might be present, and still make a profit. They have pricing power, and the demand for ORLY’s products is recession-resilient.
  • O’Reilly has fine-tuned a reliable supply chain and distribution network to get the right parts to customers at the right time.
  • In Q2, comps increased 16.2% because people spent more on their cars (they had few other leisure or entertainment options due to the pandemic). O’Reilly, which has shown itself to be resilient in a recession, can also do well in more robust economic times.

Q2 was very good, with eps of $8.33. Same-store sales (or comps) increasing 9.9% compared to the prior year period. It has a trailing 12-month revenue of $12.6 billion, and confidence from the management team.

Because of Q2 performance and a strong start to Q3, O’Reilly raised full-year 2021 guidance for comparable-store sales from a range of 1%-3% to a range of 5%-7%. They also increased full-year diluted eps guidance to a range of $26.80 to $27, which represents an increase of $2.05 at the midpoint from previous guidance.

ORLY has an expected earnings growth rate of 17.5% for the current year, and the stock price has appreciated about 30% year to date. In the last 12 months, management has reduced shares outstanding by 6.903%. 

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