We last bought O’Reilly Automotive, Inc. (ORLY) in September 2021, and sold in December for a 10% gain; the stock has floated to the top of our filters again, asserts David Fried, editor of The Buyback Letter.

O’Reilly 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 5,740 stores in the U.S., and 22 stores in Mexico.

There are a number of economic and behavioral factors that speak well for O’Reilly as a top auto stock.

* The company can flourish in good and bad economic times. During down periods, O’Reilly has generated its best revenue growth as people avoided buying new cars and fixed up existing vehicles. In good periods, O’Reilly has been able to steadily increase revenue annually.

When unemployment is low and confidence high, people drive more, which also plays into the company’s products and services. In other words, you don’t need to know what the state of the economy will be in next year to be able to invest confidently in this company.  

* With new cars sometimes hard to get, used car prices are soaring and so is demand for parts to keep them running tip top. Customers are focusing on extending the lives of their existing vehicles.  

* As the U.S. continues to try to recover from the pandemic (while still fighting off variants), auto parts retailers still look attractive. Mobility has increased, as some people have returned to work outside the home, and many people have begun to add some travel back into their lives as they navigate how to live in a Covid world.

Miles driven in 2021 returned to pre-pandemic levels and that mobility trend is expected to continue. As Americans drive more, they increase the wear and tear on their vehicles. O’Reilly wins.

* With investors worried about inflation, O’Reilly’s positioning is ideal. 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. In other words, if you car is having problems, price is not your main concern. Rather, getting it back in working order is. O’Reilly has fine-tuned a reliable supply chain and distribution network to get the right parts to customers at the right time.

* Q3 showed earnings of $8.07 per share ($7.07 a year ago), with revenues of $3.48 billion ($3.21 billion a year ago). ORLY’s stock was up 48% in 2021, and the company has a current market cap of $42 billion.

For 2021, the business was forecast to grow same-store sales by 10%-12%, a jump from prior guidance for a 5%-7% increase. Revenue and earnings per share for 2021 are expected to be up significantly year-over-year.

In the last 12 months, management has reduced shares outstanding by 6.998%.  

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