Written by Summary
Favorable long-term industry trends, excellent management inventive structures, and a business with a widening competitive advantage make O’Reilly Automotive (ORLY) this week’s Long Idea.
O’Reilly’s stock presents quality risk/reward given the company’s position to benefit from growth in the global vehicle stock and miles traveled.
ORLY has 52% upside if the company grows NOPAT just 5% compounded annually for the next decade, or one-third of the company’s 15% NOPAT CAGR from 2011 – 2021.
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jetcityimage/iStock Editorial via Getty Images A growing physical store network equips this company to offer more consumers an extensive product selection alongside knowledgeable service. Though this company improved profitability in each of the past 12 years, its stock is priced as if profits will never exceed current levels. Favorable long-term industry trends, excellent management inventive structures, and a business with a widening competitive advantage make O’Reilly Automotive Inc. (NASDAQ: ORLY ) this week’s Long Idea.
O’Reilly’s stock presents quality risk/reward given the company’s: position to benefit from growth in the global vehicle stock and miles traveled
growing physical store network that exposes the brand to more new customers
consistent and accelerating market share growth
accelerated growth strategy for professional customers
increasing operational efficiencies in its physical stores
valuation implies the company will not grow profits from current levels
Demand for Auto Parts Will Grow With Global Vehicle Stock
The U.S. Energy Information Administration’s ( EIA ) reference case projects the global internal combustion engine (ICE) light-duty vehicle fleet will peak in 2038. However, the growth in electric vehicles (EVs) will continue to expand the overall global vehicle fleet as the EIA forecasts EVs to account for 31% of the global fleet in 2050, up from less than 1% in 2020. In total, the EIA expects the global vehicle stock to rise from 1.3 billion in 2020 to 2.2 billion in 2050, growing 2% compounded annually, per Figure 1.
Figure 1: Global Vehicle Stock (ICE & EV) Reference Case: 2020 – 2050 Global Vehicle Stock Through 2050 (New Constructs, LLC) Maintenance Costs Will Rise During EV Adoption
EVs require less maintenance than ICE vehicles, which may cause some to wonder what the long-term growth prospects are for the aftermarket auto parts industry. However, the rising adoption of EVs does not mean there will be less overall demand for automotive maintenance or auto parts. On the contrary, the increase in the number of vehicles in the global fleet will continue to drive total maintenance demand higher through 2050, even as the adoption of EVs lowers per-vehicle maintenance requirements.
AAA’s Your Driving Cost study discovered maintenance, repair, and tire costs for EVs total $949/year, which is $330/year below ICE vehicles in 2019 (latest available year). If we apply these costs to the entire global fleet in 2020, maintenance costs for ICE vehicles were $1,664 billion compared to just $1 billion for EVs. Assuming per-vehicle ICE and EV maintenance costs stay the same, total global maintenance costs will grow by 2% compounded annually, from $1,665 billion in 2020 to $2,605 billion in 2050.
Figure 2: Implied Maintenance Spending [1] : 2020 Vs. 2050 Implied Vehicle Maintenance Spending 2020 to 2050 (New Constructs, LLC) Miles Traveled Are Above Pre-Pandemic Levels
Vehicle miles traveled (VMT) is another indicator of future demand for the auto parts industry. VMTs consistently rose in the U.S. from 107 billion in 1970 to 293.3 billion in 2019, 2% growth compounded annually. COVID-related lockdowns caused a decline in VMT throughout 2020 and 1H21, but VMT has since recovered to above pre-pandemic levels.Figure 3 shows the two-year change in VMT by month. In six of the last seven months of 2021 (latest available data), VMT was higher than the comparable 2019 month. The recovery of driving demand beyond 2019 levels means suppliers, such as O’Reilly, can anticipate even more demand for their products as more parts wear out from additional use. Figure 3: Two-Year Percent Change in Vehicle Miles Traveled by Month: 2019 – 2021 Vehicle Miles Travelled: 2019 vs 2021 (New Constructs, LLC) EVs and Self-Driving Will Drive VMT Higher According to AAA , 43% of EV owners say they drive more miles after owning an EV than before. Increased VMT for EVS will likely offset the EV per-vehicle maintenance cost savings that EVs promise.The same is true for self-driving cars…over the long term. Self-driving technology creates a significant reduction in perceived travel-time costs , […]
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