Rain or Shine, O’Reilly (NASDAQ: ORLY) is a Buy

O’Reilly Automotive (NASDAQ: ORLY) reported its Q3 2020 earnings two weeks ago, and the numbers were outstanding. Earnings were $7.07 per share, handily beating estimates of $6.22 and up 39% yoy. Same-store sales increased 16.9% yoy.

There were whispers that O’Reilly’s 27-year steak of same-store sales growth was in jeopardy, following a tough Q1. But Q3 marked the second consecutive quarter of 16%+ yoy comp growth, and now, the O’Reilly doubters are nowhere to be found.

The streak, which dates back to the first-year of Bill Clinton’s presidency, looks like it will be extended to 28. O’Reilly has shown that it can prosper in any economic environment, so why should the worst pandemic in 100 years be any different?

I expect O’Reilly’s comps to increase for years to come, but a) there’s nothing bold about that statement, and b) that expected growth has certainly been priced in to the shares.

But I don’t think enough growth is being priced into the shares. O’Reilly has a couple of nice tailwinds. One is a short-term tailwind, while the other is a long-term tailwind. Let’s start by looking at the short-term tailwind.

New Stimulus Should Eventually Come

The government stimulus payments and enhanced unemployment benefits provided tailwinds for O’Reilly earlier this year. On its Q3 earnings call, O’Reilly noted the “immediate acceleration we experienced when demand swung heavily in our direction in April.” But it added that those tailwinds faded as “we moved further past when those dollars were being injected into the economy.”

Another round of stimulus would bring back that tailwind. This isn’t a make-or-break situation for O’Reilly, however. The company fared quite well in Q3, and it didn’t have the stimulus tailwind and miles driven remained under pressure. But O’Reilly was still “encouraged to see continued strong demand, particularly on our professional business, where the demographics of the ultimate consumer is more likely toward jobs that have instituted work-from-home arrangements.”

There is no guarantee that a new stimulus will come, but odds are that it will.

More Old Cars Means More Customers

One of the biggest stories of 2020 (okay, maybe not one of the biggest), has been the surging used car market. The used car market is so hot, in fact, that people are buying them out of vending machines.

Automakers were forced to shut down in the early innings of the pandemic, leading to a decrease in new car inventory. So, people bought used cars instead.

But it’s not like old cars were suddenly getting love. The average lifespan of a car was 10 years in 2007. By 2019, it was 11.8 years. O’Reilly’s sales are highly correlated to both the number and age of used cars on the road.

New car availability will eventually return to pre-pandemic levels. But the shift to old cars, which had been happening for 12 years before the pandemic started, should only continue in 2021 and beyond.

O’Reilly’s Monday’s Price Action was Telling

Monday was a wild day for the market, as news of an imminent COVID-19 vaccine changed the fortunes of just about every company – some more than others.

Disney NYSE: DIS, for example, soared, since a vaccine would allow the company to fully re-open its parks sooner rather than later. Peloton NASDAQ: PTON, on the other hand, tanked, since home workouts wouldn’t be as popular in a post-vaccine world.

What did O’Reilly do? Not much, ultimately. It finished the day up around 1.5%. Reason being, rain or shine, vaccine or no vaccine, O’Reilly will be just fine.

With O’Reilly, You Know What You’re Getting

O’Reilly is about as recession-proof as it gets. Although 2021 may seem less uncertain than it was last week, 2020 has taught us that nothing is truly certain. The pandemic started as “15 Days to Slow the Spread” and we all know how that unfolded. O’Reilly is essentially a hedge against uncertainty, and that’s why it deserves a place in your portfolio.