Here’s why O’Reilly’s auto stock jumped 19% to a record high in October

What happened

Stocks of an automobile retail company O’Reilly Automotive (ORLY 0.52%) jumped 19% in October, according to data provided by S&P Global Market Intelligence. The S&P500 was up around 8%, so O’Reilly drifted higher at the start of the month on general market strength. However, at the end of the month, the company announced financial results that sent the stock soaring to an all-time high.

So what

As the chart below shows, O’Reilly stock performed well for most of October. But that changed on October 26 when it released its financial results for the third quarter of 2022.

In the third quarter, O’Reilly generated sales of $3.8 billion, up 9% year-over-year. These results were driven by strong comparable store sales (SSS) growth of 7.6%. This was only marginally better than this competitor’s 6.2% SSS growth Auto area posted for a similar period. But it was still strong growth.

O’Reilly’s SSS growth in the third quarter was cited by UBS analyst Michael Lasser when he raised his price target for the stock by 10% to $940 per share, according to The Fly. It should be noted that this is now the highest price target for O’Reilly stock among leading analysts.

Indeed, SSS is an important metric for a retail stock like O’Reilly. The company has opened 154 new sites on a net basis so far in 2022; it plans to open about 26 more in the upcoming fourth quarter and another 180-190 in 2023. When existing stores increase sales, it is strongly suggested that there is a demand for these new stores. This is the case of O’Reilly, and these new stores are its main vector of growth.

Now what

O’Reilly can continue to modestly increase revenue through the growth of SSS and by opening new stores. But earnings per share (EPS) growth tends to be the main driver of a stock over a long period of time. And O’Reilly can grow EPS at a faster rate than revenue for one simple reason: share buybacks.

ORLY data by YCharts

By steadily trimming its stock count over the past decade, O’Reilly has grown EPS faster than it otherwise could have and is a market-crushing investment over this period. This momentum continued in the third quarter, with management buying back 1 million shares. The company paid an average of $683.09 per share, about 17% less than where the stock trades at the time of this writing. So far, that looks like $710 million well spent.

After O’Reilly’s third quarter ended, he used an additional $161 million to buy back stock. And he still had $483 million more at his disposal. It will soon run out of authorization at this rate. Therefore, investors will be watching in the fourth quarter as management will likely announce a new share buyback plan.

There is no reason to believe that management will not continue to return capital to shareholders. However, the size of any new buyout plan could go a long way in determining how much it can increase its EPS in years to come.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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