The two new stocks align May’s Exec Comp with the ROIC model portfolio, which is available to members through May 13, 2022.
Recap from April’s Picks
Aligned with the ROIC model portfolio (-7.6%) Exec Comp outperformed the S&P 500 (-10.3%) from April 14, 2022 to May 11, 2022. The best-performing stock in the portfolio was up 9%. Overall, nine out of 15 Exec Comps aligned with ROIC stocks outperformed the S&P 500 from April 14, 2022 to May 11, 2022.
This model portfolio includes only stocks that earn attractive or very attractive ratings and align executive compensation with improving ROIC. I think this combination provides a uniquely well-tested list of long views because return on invested capital (ROIC) is the primary driver of shareholder value creation.
New Feature Stock for May: O’Reilly Automotive
O’Reilly Automotive (ORLY) is the featured stock in May’s Exec Comp with the ROIC Model Portfolio. I made a long idea ORLY on March 9th, 2022. Since then, the stock is down 11% and is down 9% for the S&P 500.
O’Reilly has grown revenue and net operating profit after tax (NOPAT) by 9% and 15%, respectively, over the past ten years. See Figure 1. The company’s NOPAT margin increased from 10% in 2011 to 17% in the last twelve months (TTM), while the invested capital increased from 1.1 to 2.2 in the same time. Rising NOPAT margins and invested capital turns drive the company’s ROIC to 38% TTM from 12% in 2011.
Figure 1: O’Reilly’s NOPAT and Revenue Growth: 2011 – TTM
Executive compensation precisely aligns executive incentives
O’Reilly’s executive compensation plan aligns management’s interests with the interests of shareholders, tying a 20% target ROIC of annual cash bonuses for executives.
Including O’Reilly’s ROIC as a performance target has helped to create shareholder value through increased ROIC and economic earnings. O’Reilly’s ROIC increased from 24% to 38% TTM in 2017 and nearly doubled the company’s economic revenue from $1.1 billion to $2.0 billion in the same period.
Figure 2: O’Reilly’s ROIC: 2017 – TTM
O’Reilly is not rated
At its current price of $600/share, ORLY has a price-to-economic book value (PEBV) ratio of 1.0. This ratio means that the market does not expect O’Reilly’s NOPAT to move significantly above TTM levels. This expectation seems overly pessimistic for a company that has grown NOPAT by 20% annually over the past two decades.
If O’Reilly maintains a TTM NOPAT margin of 17% and the company grows NOPAT by 6% compounded annually over the next 10 years, the stock is worth $1,000/share today – up 67%. Check out the math behind this reverse DCF scenario, Should the company further increase NOPAT in line with historical growth rates, the stock rises even more.
Important Details Found in Financial Filings by MyFirm’s Robo-Analyst Technology
Below are details about the adjustments I made based on the robo-analyst’s findings in O’Reilly’s 10-Q’s and 10-K:
Income Statement: I earned $315 million in adjustments, with the net effect of removing $179 million in non-operating expenses (1% of revenue).
Balance Sheet: I earned $356 million in adjustments to calculate invested capital with a net decrease of $13 million. The largest adjustment in operating leases was $36 million (1% of reported net assets).
Valuation: I made $6.4 billion in adjustments, all of which reduce shareholder value. In addition to total debt, the most notable adjustment was $308 million in shareholder value in outstanding employee stock options (ESOs). This adjustment represents 1% of O’Reilly’s market cap.
Disclosure: David Trainor, Kyle Guske II and Matt Schuler receive no compensation for writing about any specific stock, genre, or topic.
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