O’Reilly Automotive could benefit from inflation

O’Reilly Automotive (ORLY) is an auto parts retailer operating in the United States. The current inflation rate in the United States is above 7%, which has sent shockwaves through the market so far in 2022. All three major indices are down on the year, with the Nasdaq taking the weight of the recession. Investors often turn to more defensive stocks to protect themselves in uncertain investment markets. There are several reasons why O’Reilly could make gains, given current conditions.

Macroeconomic Tailwinds

The most worrying issue in the market today is inflation. When inflation rises, the Federal Reserve is forced to raise interest rates to slow it down. This reduces the value of companies’ future cash flows, making them less valuable to Wall Street.

This particularly hits growth stocks whose earnings are expected to come in the coming years. Investors will be looking to value stocks with quality earnings during these times, and O’Reilly is one of them. The company earned $31.10 per diluted share for fiscal 2021.

Inflation has also hit the auto market hard. There are stories every day of dealerships selling cars above the list price. One reason is the well-known shortage of semiconductors, or chips, due to supply chain issues. Automakers can’t source enough chips, and dealerships are running out of vehicles. As demand exceeds supply, prices rise rapidly.

Another recent supply hurdle has been the disruption of the flow of goods across the Ambassador Bridge due to protests. Many automakers rely on the Ambassador Bridge to receive parts, so Ford and General Motors have been forced to slow production. This appears to be a short-term problem; however, it comes at an inopportune time for automakers.

This combination of factors leads many people to keep their current vehicle longer. As these cars age, they will need more parts, and this is where O’Reilly can benefit from current market conditions. According to CNBC, the average age of an automobile is now 12.1 years old. This represents an increase from 11.9 years in 2020 and 9.6 years in 2002.

2021 results were impressive

O’Reilly posted impressive results in fiscal 2021. The company recorded sales of $13.3 billion, a 15% increase from $11.6 billion earned in 2020. Better yet, the turnover was not just the result of the price hike. Gross margin also increased by 15.3% compared to 2020.

Management has also done a great job of controlling costs. Net profit reached $2.2 billion in 2021, an increase of 24% over the previous year. In fiscal 2020, the company earned $23.53 per diluted share. This amount increased to $31.10 per diluted share in 2021.

Diluted earnings per share have been steadily increasing for many years. The company is currently trading at a price-earnings ratio below 22, which is reasonable for a very profitable and growing company.

The Taking of Wall Street

As for Wall Street, analysts are bullish on O’Reilly Auto shares, with a consensus rating of Moderate Buy. This consensus is based on eight buys, six holds and no sell ratings. The absence of sell odds suggests a measure of safety in today’s market.

O’Reilly Automotive’s average price target of $752.08 implies 10.5% upside potential.

The conditions are met for O’Reilly

O’Reilly performs at a high level. Sales and net profit are rising, and the company recently reported extremely impressive results for 2021. Meanwhile, the auto industry faces multiple headwinds that have led to runaway inflation.

Because of this, Americans are keeping their vehicles longer, and these vehicles will continue to drive demand for parts. This all adds up to bullish conditions for O’Reilly Automotive stock.

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