O’Reilly Stock Valuation Looks Too Good to be True… But It’s Not

O’Reilly NASDAQ: ORLY is set to report is Q4 earnings today after the bell. The automotive aftermarket parts supplier is coming off two consecutive quarters of 16%+ yoy comp growth. Even more impressive is the company’s long-term comp growth record; O’Reilly looks like it will complete its 28^th straight year of same-store sales growth today.

The company currently has around 5,600 stores, but plans to open 900 more stores in the long run.

O’Reilly is trading at just 20.3x trailing earnings though.

The 16% comp growth isn’t sustainable, but O’Reilly should have no problem growing comps for many years to come. Couple that with a larger footprint and O’Reilly could look like an absolute bargain in the next two years.

So why are shares so cheap?

 The most important metric for O’Reilly is miles driven. The more people drive their cars, the more they need repairs. Some investors are concerned about the long-term impact of the work-at-home trend on miles driven. The concern is justifiable; if days worked at home decreased by, say, 10% across the entire workforce after the dust settles, that would put a big dent in total miles driven.

But here’s the thing:

A lot of remote workers are moving from the cities to the suburbs. Let’s say they only have to go to the office 3-4 days a week post-pandemic, instead of the traditional 5. They could actually end up driving more because they will have to drive longer distances.

On the Q3 earnings call, O’Reilly management said that it continues to see strong demand in its “professional business” from consumers that are more likely to have “jobs that have instituted work-from-home arrangements.”

It’s impossible to pinpoint how many miles will be driven in 2021 and beyond. But the point is that the number isn’t necessarily going to decrease post-pandemic – or at least, not by as much as some fear.

Longer Car Lifespan is a Long-Term Tailwind

 Miles driven might not get all the way back to pre-pandemic levels, but O’Reilly has other tailwinds that would more than make up for any decrease.

The average lifespan of a car was 10 years in 2007. By 2019, it had increased to 11.8 years. Old cars need more repairs than new cars, so O’Reilly is benefiting from this trend. Big time.

O’Reilly Could Gain Market Share

According to O’Reilly, the top three automotive aftermarkets suppliers own less than half of the total stores in the US. The big guys have inventory and supply chain capabilities that the little guys simply can’t match. O’Reilly thinks that customers care more about convenience than price, which could lead to some industry consolidation.

Stimulus Checks Are Short-Term Tailwind

The long-term outlook for O’Reilly is outstanding, but the second (and potentially third) round of stimulus checks could be what lifts shares over the next few months. On the Q3 call, management acknowledged that demand “swung heavily in [the company’s] direction in April.” That was, not coincidentally when the first round of stimulus checks was being distributed.

The second round of stimulus checks was distributed in January and the third round could be distributed later this month or in March. That means that O’Reilly could have an incredible Q1, which management may hint at today.

And the best part is that is doesn’t look like the stimulus boost is priced into shares. O’Reilly is trading right around where it was before President Trump signed the second COVID-relief package. The S&P 500, on the other hand, is decidedly higher than it was at the time.

O’Reilly shares are actually only trading slightly higher than January 2020 levels. Shares nearly doubled off the March lows by July, but have been range-bound between around $424 and $496 over the last 6+ months.

It’s only a matter of time before the value in ORLY becomes apparent to the rest of the market. The Q4 call could get shares moving towards the higher end of the range.