Why the market may be underestimating this ASX200 player

Shares in auto parts supplier Bapcor (BAP) have fallen as much as 13% in recent months, but the market may be missing the “fundamental strength and resilience” of the company’s business, according to Morningstar analysis.

This month, Bapcor, which supplies vehicle parts, accessories, equipment, services and solutions across more than 1100 locations in Asia Pacific, became the latest addition to Morningstar’s Global Equity Best Ideas [LINK].

The list highlights high-quality Australian and New Zealand companies that are currently trading at discounts to our assessed fair values and is available in full here to Investor subscribers.

Bapcor’s addition to the list follows a rocky 12 months for the ASX200 stock’s share price, driven down in part by market concerns surrounding a pullback in discretionary spending, which it’s feared may impact the company’s retail business.

A more recent 10% decline in the stock price has written off moderate gains made earlier this year on news of a record half-year for revenue.

However, despite the Bapcor’s share price languishing, Morningstar analyst Angus Hewitt says the market’s pessimism is underappreciating the fundamental strength and resilience of the company.

Following Bapcor’s most recent trading update in May, Morningstar held firm on its assessed fair value for the stock.

Further, Hewitt notes this estimate already accounts for the more subdued retail trading environment that appears to be worrying investors.

“Rising cost of living pressures are weighing on retail revenue and margins, while the trade and wholesale divisions remain resilient,” he says.

“We had already anticipated a more subdued retail environment, which is more exposed to discretionary purchases. Demand for discretionary automotive accessories can be highly volatile amid challenging economic environments,” he says.

“Aggressive rate hikes from the Reserve Bank of Australia and rising cost of living pressures are biting, and we expect demand to ease as consumers prioritise consumer necessities like food and housing expenses over discretionary accessories.”

Nevertheless, Hewitt adds that the vast majority of Bapcor's earnings are nondiscretionary.

“Bapcor's Burson trade and specialist wholesale businesses in Australia and New Zealand comprise about 80% of group earnings, principally selling maintenance-related automotive parts,” he says.

As automotive spare parts are required for routine maintenance and repair of vehicles, Hewitt says they are less affected by changes in discretionary income and consumer confidence, and demand growth is broadly driven by the increasing pool of vehicles.

“We think concerns about discretionary consumer spending are overblown. We estimate the vast majority of earnings are tied to vehicle maintenance,” Hewitt says.

“Bapcor enjoys an element of countercyclicality and benefits when consumers choose to maintain their existing car rather than buy a new car.”

Looking beyond the near-term, Morningstar estimates Australian vehicle registrations to grow at low-single digits over the next decade, from 20 million passenger vehicles at present, tracking roughly in line with population growth.

Alongside that growth, Morningstar forecasts Bapcor to capture more market share from competitors by, according to Hewitt, distributing a wider range of spare parts quicker, more reliably, and at a lower cost.

Shares in Bapcor last traded at around a 20% discount to Morningstar’s assess fair value of $8.00 apiece.