O'Reilly Automotive: A Leader in Automotive Parts Retail

O’Reilly Automotive is one of the largest specialty retailers in the North American automotive aftermarket, serving both professional mechanics and DIY customers. With a strong track record of operational excellence, high returns on capital, and a growing store footprint, the company has carved out a durable position in a fragmented and highly competitive industry. As it expands into international markets and invests in its supply chain to support long-term growth, O’Reilly aims to stay ahead of evolving market dynamics. The question is: Does this aftermarket leader deserve a place in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in O'Reilly Automotive. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of O'Reilly Automotive either. Thus, I have no personal stake in O'Reilly Automotive. If you want to purchase shares (or fractional shares) of O'Reilly Automotive, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

O’Reilly Automotive is a leading specialty retailer and supplier of automotive aftermarket parts, founded in 1957 in Missouri. The company operates more than 6.300 stores across the United States, Puerto Rico, Mexico, and Canada, following its 2024 acquisition of Groupe Del Vasto. It serves both do-it-yourself customers and professional service providers, offering a wide range of products including new and remanufactured hard parts, maintenance items, and accessories. Services such as battery diagnostics, bulb and wiper replacements, and check engine code readings are also available in stores. A key strength of O’Reilly’s business model is its ability to serve both professional and retail customers from the same locations. This dual-market strategy enables O’Reilly to reach a broader customer base, maximize store productivity, and operate profitably in both dense urban areas and smaller, underserved markets. Sales to professional service providers have historically grown at a faster rate than DIY sales, largely due to the fragmented nature of the professional segment, which presents greater opportunities for consolidation. As of 2024, the company derives nearly equal revenue from both segments. O’Reilly’s scale provides it with significant purchasing power, allowing it to negotiate favorable terms with suppliers and offer competitive pricing while maintaining strong gross margins. The company also benefits from a robust network of 31 distribution centers and nearly 400 hub stores, which support same-day or overnight access to a wide range of parts, including many hard-to-find items. This logistical strength is especially important for professional customers, who depend on speed and reliability to serve their own clients. Together, these elements form a durable competitive moat. The combination of national scale, deep inventory availability, and a distribution system that ensures fast and reliable part delivery gives O’Reilly a structural advantage that smaller competitors struggle to match. Its ability to deliver high service levels across both customer segments—underpinned by a well-trained, technically proficient workforce - further strengthens its position. Operational discipline has been a cornerstone of O’Reilly’s long-term success. Since its IPO in 1993, the company has delivered 32 consecutive years of comparable store sales growth and earnings per share increases. This consistency reflects a strong culture of execution, disciplined expense control, and a deep bench of experienced leadership. O’Reilly promotes extensively from within, ensuring that district and regional managers have hands-on experience and a thorough understanding of the company’s values and operations.

Management

Brad Beckham serves as the Chief Executive Officer of O’Reilly Automotive, a role he assumed in January 2024. He began his career with the company in 1996 at the age of 17 as a Parts Specialist, a position that initially involved tasks like sweeping floors and organizing inventory. Over the next three decades, Brad Beckham advanced steadily through the organization, holding numerous leadership roles including Store Manager, District Manager, Region Manager, Divisional Vice President, Vice President of Eastern Store Operations and Sales, Senior Vice President of Central Store Operations and Sales, Executive Vice President of Store Operations and Sales, Executive Vice President and Chief Operating Officer, and most recently, Co-President. Brad Beckham is only the fourth CEO in the company’s history, and his promotion reflects O’Reilly Automotive’s deeply rooted culture of promoting from within. Despite not having a college degree, Brad Beckham’s extensive hands-on experience across all levels of the business has given him a unique and practical understanding of the company’s operations, culture, and customer base - knowledge that cannot be easily replicated or taught. Known internally for his operational discipline and strategic insight, Brad Beckham has earned a reputation for identifying acquisition targets that align well with O’Reilly’s long-term growth objectives. He has also demonstrated a strong ability to navigate adversity and maintain consistent performance in changing market conditions. As CEO, Beckham has emphasized his focus on expanding market share, maintaining strong profitability, and driving growth in operating profit dollars. These priorities align closely with O’Reilly’s long-standing track record of consistent financial performance and operational excellence. While still early in his tenure as CEO, Beckham’s deep institutional knowledge, leadership experience, and alignment with O’Reilly’s core values instill confidence in his ability to guide the company through its next phase of growth. Given his nearly 30 years of experience within the organization, I believe Brad Beckham is exceptionally well-positioned to uphold and extend O’Reilly Automotive’s strong competitive positioning in the automotive aftermarket industry.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. O'Reilly Automotive has consistently achieved a high ROIC over the past decade. It has exceeded 20% every year, surpassed 30% in eight out of ten years, and remained above 40% for the past three years - which is very encouraging. There are several reasons why O'Reilly has maintained such strong returns on capital. The company benefits from a resilient business model and a strong position in the automotive parts and repair market, which tends to hold up well even during economic downturns. It also continuously focuses on operational efficiency, supported by significant investments in its distribution network and inventory management systems. Upgrades and relocations of several distribution centers have helped improve service levels while lowering the cost per unit sold. O'Reilly’s disciplined approach to capital allocation is another key factor. The company prioritizes investments that deliver high returns and has demonstrated a consistent ability to grow profitably, as reflected in its 32 consecutive years of comparable store sales growth. Although ROIC declined slightly in 2024, it still remained above 40%, so this isn’t a concern. Given the company’s strong fundamentals, I believe O'Reilly Automotive is well-positioned to continue generating high returns on invested capital in the years ahead.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. At first glance, these numbers may not seem encouraging. Equity has declined year over year in eight of the past ten years and has been negative for the past four. This trend is primarily the result of O'Reilly Automotive’s aggressive use of debt to fund share buybacks. While this may look concerning on the surface, it’s important to understand the strategic intent. For much of the past decade, interest rates were low, and many companies - including O'Reilly—took advantage of cheap debt to repurchase shares, which can be an effective way to return value to shareholders and boost earnings per share. As interest rates have risen, this approach has become less attractive, and it will be worth watching whether O’Reilly adjusts its capital allocation strategy going forward. That said, the company’s overall financial health remains strong, and its ability to consistently grow profits and maintain high returns on capital suggests that this use of leverage has been carefully managed. It's also worth noting that while equity remained negative in 2024, it improved compared to 2023 - a small but positive step in the right direction.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that O'Reilly Automotive has delivered positive free cash flow every year over the past decade. However, both free cash flow and the levered free cash flow margin declined in 2023 and 2024. This can primarily be attributed to rising capital expenditures aimed at supporting the company’s growth and expansion, along with higher cash taxes and some operational pressure affecting profitability. Capital expenditures are expected to increase further in 2025, as the company plans to accelerate the expansion of its store base and distribution infrastructure. As a result, we may see another short-term decline in both free cash flow and the levered free cash flow margin, but these investments should benefit both metrics over the long term by supporting future revenue growth and operational scale. O’Reilly typically allocates its free cash flow toward reinvestment in the business, acquisitions, and share repurchases. Share repurchases, in particular, have been a consistent focus. Management has highlighted that since the inception of the buyback program in 2011, the company has repurchased 96 million shares at an average price of $264. They continue to express strong confidence that this average price is justified by the company’s expected discounted future cash flows, and they view the buyback program as an effective way to return excess capital to shareholders. Considering where the stock is trading today, I can only agree with that assessment. Currently, the free cash flow yield is at its lowest level in the past decade, indicating that the stock is trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of three years. This is assessed by dividing the total long-term debt by earnings. Upon calculating this ratio for O'Reilly Automotive, it becomes clear that the company has 2,35 years of earnings in debt. This is below the three-year threshold, indicating that debt is not a concern when considering an investment in O'Reilly Automotive. The relatively low level of debt is particularly impressive given that the company has actively used leverage to repurchase shares. Between 2015 and 2024, the number of shares outstanding decreased from 98,54 million to 57,73 million. This strategic use of debt to reduce the share count highlights O'Reilly Automotive’s effective capital management, achieving shareholder returns while maintaining a prudent debt level.

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Risks

Competition represents a significant and ongoing risk for O’Reilly Automotive due to the fragmented and dynamic nature of the automotive aftermarket. The company operates in a highly competitive landscape that includes national chains such as AutoZone, Advance Auto Parts, and NAPA, as well as regional players, wholesalers, jobber stores, automobile dealerships, mass merchandisers like Walmart and Costco, and an increasingly aggressive group of online retailers including Amazon and RockAuto. While O’Reilly’s strategy emphasizes service, technical expertise, and immediate parts availability, this model faces growing pressure. Online retailers, in particular, pose a long-term threat as consumer behavior shifts toward e-commerce. Online sales of auto parts are expected to triple over the next decade, and although O’Reilly has made investments in its omnichannel platform to adapt to this trend, it may not be enough to offset the cost and convenience advantages enjoyed by digital-first competitors. E-commerce platforms often have lower fixed costs and can offer broader price transparency, which places pressure on traditional retailers to either match prices or enhance value through service and speed. The professional segment — where O’Reilly sees strong growth — is also intensely competitive. Management has pointed out that independent parts distributors are some of the company’s toughest competitors. These independents are often well-managed, deeply entrenched in local markets, and can be more agile. In densely populated areas especially, market share is not won by default when a competitor exits - it’s often a contested, multi-way battle where service, relationships, and pricing all play a role. As O’Reilly management puts it, “it’s not just a jump ball between us and one other competitor.”

Macroeconomic conditions present a notable risk to O’Reilly Automotive, despite the company’s position in a relatively resilient segment of retail. While many of its products are non-discretionary - essential to keeping vehicles on the road - O’Reilly’s performance remains tied to the overall economic health of its customers, particularly those in the DIY segment. During periods of economic stress, such as rising interest rates, high inflation, reduced access to consumer credit, or elevated fuel prices, consumer confidence and spending can weaken. This often leads to delayed non-essential maintenance or a shift toward lower-cost alternatives. In 2024, for instance, O’Reilly saw softness in discretionary categories like tools, performance parts, and accessories - areas that tend to be the first impacted when household budgets tighten. Management has also noted that the “lower-end consumer” continues to act cautiously, with smaller average ticket sizes and fewer add-on purchases during routine repairs. Inflation adds another layer of complexity. While rising prices can boost revenue in dollar terms, they also increase input costs - such as wages, transportation, and parts - while putting pressure on consumers’ wallets. O’Reilly must strike a careful balance between maintaining margins and retaining price-sensitive customers. The company is also exposed to broader macro drivers of demand, including total vehicle miles driven, gas prices, and unemployment. Lower miles driven or sharp increases in fuel costs can reduce wear and tear on vehicles, ultimately decreasing demand for replacement parts. Additionally, a spike in unemployment or further tightening of consumer credit could further constrain discretionary spending. O’Reilly’s management has acknowledged these challenges and expressed a cautious outlook heading into 2025. While the company has weathered past cycles well, the current environment - characterized by persistent inflation, elevated interest rates, and economic uncertainty - remains a headwind that could weigh on near-term performance.

The growing adoption of electric vehicles presents a structural, long-term risk for O’Reilly Automotive. While internal combustion engine (ICE) vehicles currently dominate the roads and continue to generate steady aftermarket demand, the accelerating shift toward EVs could gradually erode key portions of O’Reilly’s business model. Unlike traditional gas-powered vehicles, EVs require fewer replacement parts and less frequent maintenance. Many high-turnover components in ICE vehicles—such as fuel pumps, oil filters, spark plugs, oxygen sensors, and timing belts—are either absent or far less prone to wear in electric drivetrains. Although EVs still need tires, brake pads, windshield wipers, and certain accessories, the overall volume of parts and frequency of repairs is significantly lower. This means that, over time, a growing share of the vehicle population may require fewer visits to aftermarket parts suppliers like O’Reilly. Analysts expect the EV market to grow nearly tenfold by 2033, which could accelerate this trend. O'Reilly itself has acknowledged in its annual report that the transition to EVs may lead to longer-lasting components, fewer required repairs, or the elimination of some repair categories altogether. While the exact pace and impact of this shift remain uncertain, the company could face long-term headwinds if it does not successfully adapt its inventory, service offerings, and customer mix. In addition, EVs may also shift more repair and maintenance activity toward dealerships and specialized service providers, particularly in the earlier phases of adoption while parts availability, diagnostic tools, and technician expertise remain concentrated in OEM channels. This trend could reduce the share of repairs handled by independent garages—an important customer segment for O’Reilly's professional business. Although the near-term impact is limited, and EV penetration is still relatively low in many of O’Reilly’s core markets, the company must continue to evolve its product assortment and capabilities to remain relevant in a changing automotive landscape. Failure to adapt effectively could pose risks to long-term growth and profitability as the industry transitions to new technologies.

Reasons to invest

Expansion of its store base is a reason to invest in O’Reilly Automotive. The company has consistently demonstrated strong execution in opening new locations that quickly become profitable, reinforcing both its top-line growth and returns on invested capital. Management has expressed continued confidence in the performance of newly opened stores, which are generating higher sales volumes and stronger cash flows than in previous years. On average, a new O’Reilly store costs between $3,0 and $3,3 million to establish, including construction, equipment, and inventory. These stores generate approximately $2,6 million in annual sales - significantly above the U.S. industry average of $1,5 million per store. Combined with O’Reilly’s scale advantages and operational efficiency, this performance translates into attractive long-term returns and reinforces the company’s disciplined approach to capital allocation. In 2024, O’Reilly opened 198 net new stores. For 2025, the company plans to open 200 to 210 net new stores across more than 35 U.S. states. This expansion is well-balanced between adding density in existing markets and entering new regions, including the Northeast, Mid-Atlantic, and Puerto Rico. The company is also shifting toward a greater mix of owned stores, with 60% of new openings in 2025 expected to be owned versus 40% leased. Although owned stores require more upfront capital, they tend to deliver higher long-term returns and provide greater flexibility. Management has identified this shift as one of the most effective long-term uses of shareholder capital, supported by improved store-level performance and increasingly attractive return profiles. O’Reilly’s dual-market strategy - serving both professional and DIY customers - allows it to operate profitably across a wide range of geographies, including less densely populated areas that many competitors overlook. This broadens its addressable market and supports continued expansion, even in more mature regions.

Investment in its distribution network is a compelling reason to invest in O’Reilly Automotive. The company’s ability to offer unmatched parts availability and timely delivery is one of its most important competitive advantages - and one it continues to strengthen through consistent capital investment. O’Reilly’s distribution network forms the backbone of its business model. It ensures that stores - and ultimately customers - receive the parts they need quickly and reliably. This is especially critical in the professional segment, where repair shops depend on same-day or next-day service to keep vehicles on the road. Management has made it clear that maintaining industry-leading parts availability is not just a strategic goal, but a core pillar of the company’s long-term success. In 2024, O’Reilly completed major upgrades to two of its distribution centers, relocating facilities in Springfield, Missouri, and Atlanta, Georgia, to larger and more advanced buildings. These projects represent more than just additional space - they also demonstrate the company’s commitment to integrating smarter, more efficient technologies into its logistics operations. New capabilities like goods-to-person automation and warehouse innovations are being deployed to improve order accuracy, reduce labor intensity, and increase throughput. In parallel, O’Reilly continues to invest in its hub store network. These larger regional locations act as mini-distribution centers, offering same-day access to a wider range of SKUs for surrounding stores. By carrying rare and less frequently needed parts, hub stores help maintain high service levels and support the company’s dual-market strategy, which targets both DIY and professional customers. O’Reilly plans to expand both the number and size of these hubs in 2025, citing strong historical returns from these investments. Crucially, the company builds out its distribution capacity ahead of store expansion. This forward-looking approach ensures that product availability and customer service are never compromised as the footprint grows. It also gives O’Reilly the confidence to enter new markets while maintaining its high standards for in-stock rates and delivery speed.

International growth represents a meaningful long-term opportunity for O’Reilly Automotive and is a compelling reason to invest in the company. While the bulk of O’Reilly’s store base and revenue still comes from the United States, the company is steadily expanding into international markets where industry dynamics may offer more durable tailwinds. Mexico is a key area of focus. In 2024, O’Reilly opened 25 new stores in the country, bringing its total to 87, and plans to open a similar number in 2025. Although still in the early stages of its Mexican expansion, the company is beginning to scale beyond its original core in Guadalajara, gaining momentum across multiple markets and increasing store density in adjacent regions. With low current store penetration and a large population of aging vehicles, Mexico offers significant runway for growth. Importantly, the transition to electric vehicles - one of the long-term structural risks to O’Reilly’s U.S. business - is progressing more slowly in Mexico. Due to a combination of economic, regulatory, and infrastructure-related factors, EV adoption remains minimal. Most vehicles on the road are traditional internal combustion engine cars, which require more frequent maintenance and a broader array of replacement parts. As a result, O’Reilly’s core value proposition—broad inventory, fast delivery, and expert service - remains highly relevant and is likely to stay so for much longer than in more EV-advanced markets. This dynamic could make Mexico a more attractive and stable market for the company’s traditional offerings over the long term. Canada is another market where O’Reilly is laying the foundation for future growth. At the end of 2024, the company operated 26 stores in Canada following its acquisition of Groupe Del Vasto. While store growth in Canada is expected to remain modest in the near term, 2025 will be a foundational year for building out the development pipeline and strengthening the internal capabilities needed to support organic expansion. O’Reilly’s methodical approach - blending acquisitions with long-term infrastructure planning - positions it to scale efficiently as its Canadian footprint expands. With a total of 113 international stores at year-end 2024 (87 in Mexico and 26 in Canada), O’Reilly’s footprint outside the U.S. remains relatively small, highlighting the size of the opportunity ahead. As the company applies its proven dual-market strategy in these new geographies—serving both DIY and professional customers - it has the potential to unlock new revenue streams while diversifying its geographic exposure.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 40,66, which is from the year 2024. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 7,9% in the next five years. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on O'Reilly Automotive's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $347,17. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy O'Reilly Automotive at a price of $173,59 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 3.050, and capital expenditures were 1.023. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 716 in our calculations. The tax provision was 658. We have 57,73 outstanding shares. Hence, the calculation will be as follows: (3.050 – 716 + 658) / 57,73 x 10 = $518,27 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With O'Reilly Automotive's free cash flow per share at $35,10 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $403,21.

Conclusion

I believe that O'Reilly Automotive is an intriguing company. The CEO, while new to his role, brings decades of experience within the organization, having worked his way up through a variety of leadership positions. I value this type of leadership, as it provides a deep, firsthand understanding of the company and the industry. O'Reilly has consistently delivered a high return on invested capital (ROIC), and given its strong business model, I expect this to continue. While free cash flow and the levered free cash flow margin have decreased slightly over the past two years, this is largely due to increased capital expenditures aimed at long-term growth - investments that should ultimately benefit shareholders. Competition remains a significant risk due to the fragmented and increasingly crowded nature of the automotive aftermarket, with pressure from national chains, regional players, and fast-growing online retailers like Amazon. Macroeconomic conditions also pose a risk, as inflation, high interest rates, and reduced consumer credit can weaken demand, especially in the DIY segment. Additionally, the transition to electric vehicles presents a long-term challenge, as EVs require fewer parts and less frequent maintenance, potentially reducing demand for many of O'Reilly’s core offerings. Despite these risks, several growth drivers support the investment case. Expansion of its store base is a key strength, as new locations consistently become profitable and contribute to both revenue growth and strong returns on capital. O'Reilly’s disciplined and balanced approach to growing in new and existing markets reinforces long-term value creation. Investment in its distribution network is another important advantage. The company’s ability to offer fast, reliable parts availability - especially to professional service providers - relies on a well-developed logistics infrastructure that continues to evolve through automation and regional expansion. International growth adds a further layer of opportunity. O’Reilly is expanding into underpenetrated markets like Mexico and Canada, where its business model remains highly relevant. In particular, the slower pace of EV adoption in Mexico supports sustained demand for traditional automotive parts, making the market especially attractive over the long term. Overall, I believe O'Reilly Automotive is a great company. Buying shares at the intrinsic value of the Payback Time price of $806 would represent a strong long-term investment opportunity.

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