Amid a backdrop of all-time high prices, five O’Reilly Automotive Inc. (NYSE: ORLY) executives sold a collective 235,000 shares in late February, and retiring Executive Vice President of Expansion Ted Wise led the charge securing nearly $30 million from the stock moves.
Between Feb. 23 and Feb. 26, administrators from board Chairman David O’Reilly to information systems Senior Vice President Steve Jasinski made the stock transactions after shares crossed the $200 threshold.
In all, the sales represented nearly $50 million over a four-day period. Since early February when the stock surpassed $200 per share, at least nine executives have sold shares, according to U.S. Securities and Exchange Commission filings.
“The majority of the activity for Ted [Wise] relates to the exercise of stock options that he has been awarded over the years as a portion of his incentive compensation package,” O’Reilly Automotive spokesman Mark Merz said via email. “Each of Ted’s options have a 10-year contractual life and must be exercised prior to that time or they will expire. As we announced in a press release in December of 2012, Ted began transitioning toward retirement, after faithfully serving the company for over 40 years.”
Merz said Wise was unavailable for an interview and no date is set for his full retirement. According to Springfield Business Journal archives, Wise also sold 95,000 shares between Oct. 23 and Nov. 6, earning him nearly $16.5 million.
Historically speaking, ORLY shares are roughly seven times as valuable as they were a decade ago.
The stock options at O’Reilly allow executives to purchase stock at a pre-existing rate within a given time period. For example, in exercising stock options on over 85,000 shares on Feb. 23-24, Wise bought 25,000 shares at $22.65, 45,000 at $28.69 and 10,178 at $39.52. That means in exercising those options, Wise spent nearly $2.26 million before being able to make roughly $17.7 million on the sale of those shares.
Merz said the O’Reilly board of directors sees stock options – specifically, nonqualified stock options, which allow the receiver to pay ordinary income tax on the difference between the grant price and the selling price when the shares are sold – as a valuable incentive to keep the stock moving in the right direction.
“The board strongly believes that compensating company management with equity awards aligns the interests of the company’s management with that of our shareholders,” he added.
The moves come as the company released its 2014 fourth-quarter and year-end earnings report on Feb. 4, which pushed the stock to a record high Feb. 5 of $214.15 per share. The Springfield-based auto parts retailer, which comprises over 4,360 stores in 43 states, generated fourth-quarter net income of $181.7 million, a 19 percent boost over $152.3 million a year earlier. Fourth-quarter sales were $1.8 billion, an 8.8 percent jump from 2013.
By comparison, shares of Memphis, Tenn.-based AutoZone Inc. (NYSE: AZO) were selling for around $648 a share by press time, following sales of $2.1 billion in the quarter ending Feb. 14. Sales were up 7.7 percent compared to the same quarter in 2014, and AutoZone reported 5,476 stores companywide. Roanoke, Va.-based Advance Auto Parts Inc. (NYSE: AAP) posted $2.1 billion in fourth-quarter 2014 sales, which was an increase of 48 percent. The company operates 5,261 stores, and shares were selling March 5 for around $152 apiece.
Dan Malachowski, owner of Baron Financial Group LLC, said companies across industry sectors use stock as incentives, but each business and ownership group is different.
“When I was getting into the business in 1999, the tech boom was happening and you had a lot of small tech companies that, instead of offering huge salaries, offered a ton of stock options,” he said. “It was their way of saying, ‘You’re not going to get rich now… but you may get rich later.’ There are still a lot of companies that offer stock options for board members or for executives or employees. It’s across the board.”
According to The National Center for Employee Ownership, about 9 million employees in the U.S. owned stock options in 2012, but that’s down about 30 percent from a high in 2001.
However, Malachowski said corporate incentives can vary from matching contributions for retirement plans to paid vacations. Stock options are just one tool.
Malachowski said the recent O’Reilly moves shouldn’t alarm other shareholders given that Wise is retiring.
“Now, if there were several members of the board unloading a lot of shares, that might be a different story,” he said. “But it seems like a pretty isolated incident at this time.”
However, Malachowski said investors could see the sales by multiple executives as a sign the stock is peaking.
Merz said O’Reilly executives are subject to restrictions on when they can buy and sell shares of the company’s stock, and these “open” and “closed” windows coincide with its quarterly earnings releases.
“Several days after the company released its fourth-quarter and full-year earnings results in early February, an open window started and executives were permitted to buy and sell shares,” Merz said. “It is not uncommon to have several transactions from multiple executives occur in a very short period of time, like this February or what occurred several months ago, as these periods are associated with open trading windows.”
For most companies, Malachowski said it’s up to the individual when they would sell their shares. But given ORLY’s recent performance, he said it is not surprising to see some shares being sold by executives.
“The mantra of every investor is, ‘Buy low and sell high.’ And with O’Reilly, we’re looking at near-record highs,” he said.
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