Despite its strong 2015 stock surge of around 36%, it seems foolish to bet against shares of O'Reilly Automotive (ORLY) - Get Report to drive higher. And this is even with 12-month stock gains of around 55% already on the table. O'Reilly reports third-quarter earnings after the closing bell Wednesday. Owing to rising auto sales, O'Reilly now has both speed of growth and momentum in profits on its side.
Having beaten Wall Street's earnings and revenue estimates in seven straight quarters, O'Reilly, the largest auto parts retailer in the U.S. by market capitalization, is seemingly firing on all cylinders. The Springfield, Mo.,-based retailer has seen its stock drive towards all-time highs, benefiting from an auto sales industry that is on pace to drive its highest sales rate in a decade, according toAutomotiveNews.
The seasonally adjusted annualized sales rate (SAAR) for September was 18.17 million vehicles, exceeding the 17.81 million vehicles sold in August. That's the highest number of vehicles sold since 2005. "We're in a very good, vibrant economic backdrop for vehicle sales," said Mark LaNeve, vice president of U.S. marketing, sales and service for Ford Motor (F) - Get Report .
And with the SAAR rate running above 15.5 million vehicles in four out of five months, this bodes well for auto-related stocks like O'Reilly, which is poised to deliver its eight straight earnings and revenue beat Wednesday, according to analysts.
Since the start of the quarter that ended September, earnings per share (EPS) estimate has risen almost 2%, from $2.34 a share to $2.38. During that span, EPS estimate for the full year has climbed from $8.70 a share to $8.91.
It's true, $8.91 a share would still translate to an expensive forward P/E of 28 for O'Reilly. After all, the S&P 500 (SPX) trades at a forward P/E of 17. But $8.91 a share would translate to year-over-year earnings growth of 21%, more than three times the average earnings growth produced by S&P 500 companies in the past couple of years.
Based on 2016 consensus EPS estimate of $10.10, O'Reilly is projected to grow earning by more than 13% above 2015 projections. That would be two percentage points higher than 2016 earnings growth estimates for rival AutoZone (AZO) - Get Report , the second-largest U.S. auto parts retailer by market capitalization.
Analysts, on average, expect O'Reilly to grow earnings at an annual rate of more than 15% in the next five years. For O'Reilly to achieve this, it will have to surpass 2016 growth targets in one or more of those years. Accordingly, holding the stock for the long-term and benefiting from rising auto sales is the smart play ahead of Wednesday's results.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.