Stock Analysis

Does O'Reilly Automotive (NASDAQ:ORLY) Deserve A Spot On Your Watchlist?

NasdaqGS:ORLY
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For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it currently lacks a track record of revenue and profit. Sometimes these stories can cloud the minds of investors, leading them to invest with their emotions rather than on the merit of good company fundamentals. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.

So if this idea of high risk and high reward doesn't suit, you might be more interested in profitable, growing companies, like O'Reilly Automotive (NASDAQ:ORLY). While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.

Check out our latest analysis for O'Reilly Automotive

How Fast Is O'Reilly Automotive Growing?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS) outcomes. So it makes sense that experienced investors pay close attention to company EPS when undertaking investment research. Shareholders will be happy to know that O'Reilly Automotive's EPS has grown 22% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away satisfied.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. While we note O'Reilly Automotive achieved similar EBIT margins to last year, revenue grew by a solid 11% to US$15b. That's encouraging news for the company!

The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.

earnings-and-revenue-history
NasdaqGS:ORLY Earnings and Revenue History August 8th 2023

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of O'Reilly Automotive's forecast profits?

Are O'Reilly Automotive Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$56b company like O'Reilly Automotive. But we do take comfort from the fact that they are investors in the company. Notably, they have an enviable stake in the company, worth US$575m. Investors will appreciate management having this amount of skin in the game as it shows their commitment to the company's future.

It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, you'd argue that they are indeed. For companies with market capitalisations over US$8.0b, like O'Reilly Automotive, the median CEO pay is around US$12m.

The CEO of O'Reilly Automotive only received US$5.5m in total compensation for the year ending December 2022. That's clearly well below average, so at a glance that arrangement seems generous to shareholders and points to a modest remuneration culture. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.

Does O'Reilly Automotive Deserve A Spot On Your Watchlist?

If you believe that share price follows earnings per share you should definitely be delving further into O'Reilly Automotive's strong EPS growth. If you still have your doubts, remember too that company insiders have a considerable investment aligning themselves with the shareholders and CEO pay is quite modest compared to similarly sized companiess. This may only be a fast rundown, but the key takeaway is that O'Reilly Automotive is worth keeping an eye on. It's still necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with O'Reilly Automotive (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Although O'Reilly Automotive certainly looks good, it may appeal to more investors if insiders were buying up shares. If you like to see insider buying, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Valuation is complex, but we're helping make it simple.

Find out whether O'Reilly Automotive is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.