O'Reilly Automotive (ORLY -0.13%) and Snap-on (SNA 0.96%) have far outpaced the broader market over the last few decades despite their rather ordinary-sounding operations. The companies have delivered total returns of 8,790% and 1,790%, respectively, since 2000 -- far superior to the 469% total return of the S&P 500 index.
But best of all for investors is the fact that the two companies look poised to continue their multibagger ways far into the future. These niche leaders -- with their robust profitability, steady growth, and reasonable valuations -- could add market-beating potential to any portfolio.
O'Reilly Automotive: Total return of 8,790% since 2020
Vehicle repair retailer O'Reilly Automotive has delivered 31 consecutive years of sales and earnings growth. Despite this extended run, the company's growth story might still be in its middle chapters.
It now has 6,217 stores, but only 31 in New York, one in Maryland, and none in New Jersey or Delaware. That leaves the company with plenty of room to continue expanding in the Northeast. It has substantial store counts in Texas (831), California (589), and Florida (290), but the population centers in the Northeast could support hundreds of new stores, and the company plans to build a new distribution center in the region.
O'Reilly has been expanding its footprint into North America's other nations as well. In 2019, it acquired Mexican chain Mayasa Auto Parts, adding 21 stores to its total. And in January of this year, it bought Canadian retailer Vast-Auto, with its 23 stores. It's taking a slow-and-steady approach to these new foreign markets, but management sees the potential for hundreds of stores -- and eventually thousands -- over the long term. These greenfield expansion opportunities should allow it to extend its 20-year streak of adding at least 149 stores annually.
What makes these expansion plans look so promising for investors is that O'Reilly's return on invested capital (ROIC) of 67% is one of the highest on the market. This measure of the net income the company generates compared to its debt and equity gives it the fifth-highest ROIC in the S&P 500, and it indicates that it is masterful at growing its store count profitably.
The cherry on top for investors? The company has consistently lowered its share count by nearly 6% annually over the last decade, making it one of the most shareholder-friendly businesses. Its market-average price-to-earnings (P/E) ratio of 24 makes O'Reilly look like a perfect example of a premium business trading at a fair price.
The company should thrive regardless of the ongoing shift to electric vehicles (EVs) because it generates 47% of its sales from the professional service centers that it supplies with parts.
Image source: Getty Images.
Snap-on: Total return of 1,790% since 2020
O'Reilly is a leader in selling after-market vehicle parts, and Snap-on is the leading provider of the tools and other equipment that professional mechanics need in order to install those parts. Snap-on sells more than 70,000 unique products, including power tools, vehicle lifts, software diagnostics for mechanics, and heavy-duty and custom-tailored tools for commercial and industrial applications.
The company is by no means a hypergrowth stock, with annualized sales increases of 5% over the last decade. However, this slow-and-steady top-line growth, paired with the company's ballooning net profit margins, has nearly tripled its earnings per share (EPS) over that time.
SNA revenue (TTM) data by YCharts; TTM = trailing 12 months.
Since 2014, Snap-on's net profit margin has risen from 11% to 20%, highlighting the company's robust pricing power and improving operational efficiency. This pricing power is a result of its leadership as a one-stop shop for its customers' most essential needs in its niche, giving it a wide competitive moat.
Despite the importance of Snap-on's products to mechanics, the market continues to worry about the company's future as the world shifts toward EVs, and automobiles are packed with cutting-edge technology. These concerns have left the stock trading at just 14 times earnings, meaning that it is priced for virtually no real growth.
CEO Nicholas Pinchuk believes these fears are overblown. About 80% of car repairs today don't involve the powertrain (the engine, transmission, and parts that deliver the power to the ground), so for those fixes, it will make no difference whether the vehicle in question is powered by electricity or an internal combustion engine. Additionally, with the increasing levels of compartmentalization in newer cars, more parts must be removed for mechanics to access those parts that need repair -- and that requires more Snap-on tools.
Also, the increasing complexity of automotive technology means the company's software and computer-based diagnostics should only become more crucial with time. These higher-margin solutions should help Snap-on keep its net margin well above the industry average, leaving the company well positioned to thrive amid the ongoing shift to EVs.
As Snap-on continues growing its software and diagnostics lines, its ROIC -- currently a high 17% -- could continue to improve, making the company a strong candidate to outperform.
Snap-on is also shareholder-friendly. It pays a dividend that yields 2.7% at the current share price, and has bought back roughly 1% of its shares outstanding annually over the last 10 years. These returns to investors, paired with the company's essential products and top-notch profitability, make Snap-on a great buy today, especially with the market pricing it to fade into obscurity.
