I wouldn’t be surprised if the Bapcor Ltd (ASX: BAP) share price hit $7.
When?
I can’t say, but if the company keeps growing as many expect, it’s a very real possibility.
What Does Bapcor Do?
Originally called Burson Group, Bapcor is a specialist auto parts business. What most consumers don’t know is that it’s more than a retailer of spare parts. Its bread and butter is trade services. For example, when you get your car serviced by a mechanic, the mechanic doesn’t store all of the parts for the make and model of your car in their shop. Instead, they rely on a nearby distributor like Burson’s who can deliver the exact parts within a matter of hours.
Over 50% of Bapcor’s business is Burson’s specialised trade services. The trade services business gives Bapcor a surprisingly strong competitive advantage. For example, most mechanics won’t drive to a store to source parts on their own time, nor will they buy parts online. It’s easier and more efficient for them to rely on the experts at Burson. In effect, their business is built on having Burson available.
On the retail side, Bapcor now owns Autobarn which is a lower quality business but nonetheless a new and complementary growth driver. Bapcor has made a habit of acquiring other companies since it listed on the ASX.
Upside
While the global transportation industry is in a state of transition (think: electric cars, autonomous vehicles, etc.), many of these potentially existential risks could be considered ‘low probability’. For example, it’s estimated less than 2% of cars sold new today are electric (electric cars have fewer parts, meaning fewer services). Other risks include a slow-down in consumer spending or speedy online delivery.
Bapcor is a neat business because it has tailwinds at its back, such as a growing population and more cars on the road. The neat part is that Bapcor sits in a sweet spot where it can raise prices consistently and the customer (a mechanic) usually just passes the cost on to the consumer/driver. The consumer/driver really has no choice but to pay up — do they pay an extra few dollars a year or do they go without a car?
Valuation & dividends
It’s the consistent upside, quality management and defensive features of Bapcor which should enable it to maintain a high valuation multiple, in my opinion. Despite trading on a price-to-profit (P/E) ratio of 21x (compared to the market’s 16x), I wouldn’t be surprised to see Bapcor’s share price go higher yet. And with a 2.2% dividend to boot, it’s a tempting buy-to-hold proposition, even at these prices.
However, for me, for now, Bapcor is a company that will stay on my watchlist. You’ll find three other proven ASX share ideas in the free investing report below.
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