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O'Reilly Automotive- Aftermarket Gains

Our latest focus stock of the week is O’Reilly Automotive (ORLY), which carries our highest investment recommendation of 5-STARS, or Strong Buy, notes Garrett Nelson, an analyst with CFRA Research's The Outlook.

The company is one of the largest U.S. retailers of automotive aftermarket parts and accessories, with 5,306 stores in 47 states as of March 31, 2019.

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The company’s top states in terms of store count are Texas and California, which together comprise just under 25% of its total. Stores located in seven other states — Missouri, Georgia, Illinois, Florida, Ohio, Tennessee and Michigan — account for another one-quarter of ORLY’s count.

The company has a dual market strategy, targeting Do-It-Yourself (DIY) customers as well as Do-It- For-Me (DIFM) customers (auto repair shops). In FY 18, 57% of the company’s sales were to the DIY market and 43% to DIFM customers.

Our positive investment view reflects positive auto aftermarket fundamentals being driven by a record-high U.S. average vehicle age (11.7 years at year-end 2018), an opinion that ORLY is a high quality name (~53% gross margins) with a history of returning capital to shareholders via share repurchases and a stock that historically performed well during periods of slower economic growth.

We think ORLY’s growth will be supported by solid comp sales growth of roughly 4%, 200+ net new store openings in 2019 and market share gains at the expense of certain auto aftermarket competitors.

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The company has a long history of profitable and aggressive greenfield growth, adding new stores to increase market share across its existing footprint and expanding into new markets. The company has opened at least 170 net new stores each year since 2011.

In May, the company announced an additional $1 billion share repurchase authorization, raising its aggregate authorization to $12.75 billion.

In the first quarter of 2019, ORLY bought back $322 million of common stock after executing share repurchases of $1.71 billion in 2018, $2.17 billion in 2017 and $1.50 billion in 2016. The basis of our 12-month target price of $460 is 22.7x our 2020 EPS estimate, in line with its five-year average forward P/E multiple.

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