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Apple fiscal Q4 earnings preview

3 Reasons Why Growth Investors Shouldn't Overlook O'Reilly Automotive (ORLY)

Zacks Equity Research
·3 mins read

Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. However, it isn't easy to find a great growth stock.

That's because, these stocks usually carry above-average risk and volatility. In fact, betting on a stock for which the growth story is actually over or nearing its end could lead to significant loss.

However, it's pretty easy to find cutting-edge growth stocks with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.

Our proprietary system currently recommends O'Reilly Automotive (ORLY) as one such stock. This company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Studies have shown that stocks with the best growth features consistently outperform the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.

While there are numerous reasons why the stock of this auto parts retailer is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for O'Reilly Automotive is 19%, investors should actually focus on the projected growth. The company's EPS is expected to grow 20.9% this year, crushing the industry average, which calls for EPS growth of 4.3%.

Impressive Asset Utilization Ratio

Asset utilization ratio -- also known as sales-to-total-assets (S/TA) ratio -- is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Right now, O'Reilly Automotive has an S/TA ratio of 0.98, which means that the company gets $0.98 in sales for each dollar in assets. Comparing this to the industry average of 0.93, it can be said that the company is more efficient.

In addition to efficiency in generating sales, sales growth plays an important role. And O'Reilly Automotive is well positioned from a sales growth perspective too. The company's sales are expected to grow 9.9% this year versus the industry average of 3.2%.

Promising Earnings Estimate Revisions

Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

There have been upward revisions in current-year earnings estimates for O'Reilly Automotive. The Zacks Consensus Estimate for the current year has surged 1.5% over the past month.

Bottom Line

O'Reilly Automotive has not only earned a Growth Score of A based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #2 because of the positive earnings estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination positions O'Reilly Automotive well for outperformance, so growth investors may want to bet on it.


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