O'Reilly Automotive Inc (NASDAQ:ORLY) Passes the "Caviar Cruise" Quality Stock Screen

For investors looking to assemble a portfolio of durable, long-term holdings, the principles of quality investing offer a useful framework. This method centers on finding companies with lasting competitive strengths, skilled leadership, and a consistent history of generating high returns on capital. One applied technique for finding these companies is the "Caviar Cruise" stock screen, which uses a set of numerical filters to find businesses with solid past results, good profitability, and sound finances. The screen focuses on measures like continued revenue and profit increase, high returns on invested capital, strong free cash flow generation, and reasonable debt amounts, all signs of a quality company.

A recent search using this process has identified O'Reilly Automotive Inc (NASDAQ:ORLY) as a candidate for more review by investors focused on quality. The auto parts retailer seems to satisfy the main financial standards that point to a profitable, well-managed business with a solid operational base.

Satisfying the Main Quality Filters

The Caviar Cruise screen applies a number of important financial limits to find quality. O'Reilly's reported numbers match these limits closely:

• Revenue & Profit Increase: The screen looks for a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. O'Reilly exceeds this, with a 5.86% revenue CAGR and a stronger 11.10% EBIT CAGR. Significantly, EBIT increase is higher than revenue increase, a key filter that shows improving profitability and possible operational effectiveness.
• High Returns on Capital: A main idea of quality investing is assessing how well a company uses its capital. The screen requires a Return on Invested Capital (excluding cash, goodwill, and intangibles) above 15%. O'Reilly performs well here, reporting a number of 41.08%, which implies the company produces significant profit from each dollar put into its main business.
• Good Cash Flow and Reasonable Debt: Quality companies convert accounting profits into actual cash. O'Reilly's average "Profit Quality" (Free Cash Flow/Net Income) over five years is 110.66%, above the 75% screen limit, showing very good cash generation. Also, its Debt-to-Free Cash Flow ratio of 3.79 is below the screen's maximum of 5, meaning the company could pay off all its debt in less than four years using its present cash flow, a signal of financial health.

Fundamental Condition and Valuation Perspective

An inspection of O'Reilly's detailed fundamental analysis report gives a wider picture. The report gives the company a medium total score of 5 out of 10, but this hides particular strong points and specific weak points typical of its retail structure.

Key Strengths:

• Profitability is a clear strength, with a score of 8 out of 10. The company regularly achieves high margins and very good returns on capital that are among the best in its field.
• Financial stability is good, supported by a healthy Altman Z-score and the positive debt-to-FCF ratio mentioned before. The company has also been lowering its share count over time, which can help per-share results.

Points to Consider:

• Liquidity measures are low, with low current and quick ratios. This is common for asset-light, inventory-heavy retailers like O'Reilly but needs investor awareness.
• Valuation is high, with a Price-to-Earnings ratio above 32. The valuation score is a low 2 out of 10, implying the market already values the company's quality highly. Increase is also predicted to slow from its historical rate.
• The company does not provide a dividend, which might be a factor for some investors seeking income.

Is O'Reilly a Quality Investment?

Judging by the numerical filters of the Caviar Cruise screen, O'Reilly Automotive makes a good argument. It shows the traditional quality investing characteristics of high and improving profitability, very good capital use (shown by its high ROIC), and a financial position that supports ongoing operations and increase. The company's necessary function in the automotive aftermarket, a sector frequently viewed as stable during downturns, adds a non-quantitative aspect of endurance to its business.

Still, the quality investing method includes more than just meeting a screen's criteria. It needs an assessment of valuation and long-term competitive standing. While O'Reilly's financials are very good, its high price requires belief in its capacity to keep performing well for the future. Investors must decide if they accept paying the current price for this degree of confirmed business strength.

For investors wanting to review other companies that meet similar strict quality filters, you can use the Caviar Cruise screen yourself through this link to the stock screener.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.