Bapcor Ltd (ASX:BAP) and ARB Corporation Ltd (ASX:ARB) are two tough competitors in the aftermarket car parts industry and are sometimes touted as shares to beat a recession. Which is the better buy?
About Bapcor And ARB
Bapcor and ARB are both retailers of spare car parts. Bapcor is also a trade services business, supplying mechanics with parts on demand. ARB differs in that it focusses on 4×4 accessories and parts to handle the Aussie outback. It has positioned itself as the largest distributor of 4×4 accessories in Australia.
These two businesses have almost exactly the same market capitalisation but there are a few key differences in the fundamentals.
Debt-to-equity: Bapcor has a debt-to-equity ratio of around 50% while ARB reported no debt at the end of the last half year. This has to be a point to ARB for a stronger balance sheet.
Growth rates: Bapcor reported 1H19 revenue growth of 3.2% and an increase of 6.6% for NPAT. Bapcor’s gross margin improved by 1.5% to 47.1%
ARB grew sales revenue by 5.6% in the same period and profit before tax by 5.1%. They reported a profit after tax of $27.3 million, compared to $43.1 million for Bapcor, but Bapcor’s revenue is also about three times higher.
Overall, growth rates were similar but ARB may have been slightly better.
Return on equity: ARB earns a return on equity of 16.8% while Bapcor’s ROE is slightly lower at 13.4%.
Multiples: Bapcor trades on much lower multiples; a price/sales ratio of 1.23x and a price/earnings ratio of 17.84x. ARB trades on a P/S ratio of 3.53x and a P/E ratio of 26.43x.
Is Bapcor A Recession Beater?
It is sometimes said that Bapcor could be a company to own during a recession because of its defensive revenue stream. The thinking goes that in a recession, consumers avoid buying new cars and instead opt to replace parts on their older cars which would benefit a business like Bapcor. Car sales have actually seen reasonable declines in the last few months, so this theory might be tested soon.
ARB doesn’t really have the same advantage as its parts and accessories tend to be used more often for recreational activities rather than necessary transport, so a cut to consumer confidence and spending power could have more of an effect on ARB than Bapcor.
What Does All This Mean?
Looking at the figures, it seems like the two companies have a similar growth rate, but Bapcor’s profit and sales are higher so the P/S and P/E multiples are lower. On top of this, Bapcor has a very high gross margin.
ARB earns a higher return on equity, has no debt, and may have a marginally higher growth rate, but overall it seems like Bapcor presents better value for money at current prices, especially if you believe the defensive revenue argument for Bapcor.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.