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Why I think the Bapcor share price is a buy

Phil Harpur

When looking for new segments in the ASX market to invest in, the automotive spare part business may not sound the most exciting, but initial impressions can often be deceiving…

Bapcor Ltd (ASX: BAP) is the largest and leading second-hand car parts distributor in Australia and New Zealand and has a number of brands under its umbrella, including Burson, Autobarn and Autopro. 

Bapcor has been strongly growing its local Australian and New Zealand presence through acquisitions and the expansion of its existing business chains. Recent acquisitions include Driveline and Diesel Drive, which are part of Bapcor’s expansion into the Japanese and Australian wholesale markets.

Bapcor is also expanding into Thailand, which could provide the company with a useful launching pad for further expansion into Asia.

Solid revenue growth continues

In Bapcor’s FY19 results, revenues increased by 4.8% to $1,297 million and earnings before interest, tax, depreciation and amortisation was up 9.8% to $165 million, in line with guidance. While growth is slowing as it becomes a larger organisation, compared to prior years, it was still a reasonably solid result.

Bapcor continues to generate solid same store sales growth and profit margin improvement.

I believe it still has significant potential to grow over the next few years with lots of new store openings in the pipeline.

Competitive strengths are growing

Bapcor is an excellent defensive share because, even when the economy is struggling, people still need to get their car fixed, and may actually be more inclined to keep repairing their current car rather than buying a more expensive newer one.

Its truck parts business continues to expand with more targeted acquisitions, creating further diversification of its earnings base. Bapcor also continues to make significant technology and infrastructure investments in warehousing, retail point of sale and information technology.

In terms of size, Bapcor has grown to the point where it now has a strong economies of scale advantage against most of its competitors.

Do electric vehicles pose a threat to Bapcor?

The growth of the electric vehicles market could potentially be a long-term risk to Bapcor. Electric vehicles have far fewer parts and require significantly less maintenance than traditional internal combustion engine cars that run on petrol. Both of these factors will mean that fewer parts will be required from mechanics, thus potentially impacting Bapcor’s core business.

However, in my opinion, this trend is unlikely to have any significant impact on Bapcor’s operating margins or revenue in the short-to-medium term. Although the number of electric vehicles is growing quickly, it is important to point out that this is occurring off a very tiny base. Currently, electric vehicles make up only about 0.5% globally of all cars internationally, and less than a 10th of that in Australia (i.e. less than 0.05%), so it’s hardly likely that they are any immediate threat to Bapcor’s core business.

Foolish takeaway

Although Bapcor’s share price has not performed particularly well over the last 12 months, I think this represents a good buying opportunity. It is also trading with an attractive price-to-earnings ratio of 18.6.

While revenue growth has slowed down over the past few years, there are still plenty of opportunities for Bapcor to grow both locally and internationally. As it achieves further scale this will enable it to spread cost further over a larger base and further increase its margins.

Bapcor also offers investors an attractive 2.8% fully-franked dividend yield.

The post Why I think the Bapcor share price is a buy appeared first on Motley Fool Australia.

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Motley Fool contributor Phil Harpur owns shares of Bapcor. The Motley Fool Australia owns shares of and has recommended Bapcor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020