Bapcor’s (ASX: BAP) fiscal 2026 first-quarter revenue was about 3% lower than last year. The company expects full-year underlying net profit of $51 million-$61 million, 30% lower than last year at the midpoint, heavily weighted to the second half.

Why it matters: We cut our fiscal 2026 underlying net profit forecast by 36% to $60 million. We reduce our longer-term forecasts by about 19% due to lower profitability at baseline and weaker retail performance. In his words, CEO Angus McKay is dealing with “the sins of [Bapcor’s] past.”

  • Excluded from underlying guidance is a pretax hit of $12 million relating to inventory adjustments and a margin impact in the tools and equipment business following a stocktake. While further detail was lacking, real profitability in Bapcor’s trade segment was likely lower.

The bottom line: We lower our fair value estimate 17% to $5 per share due to lower earnings at midcycle. Shares appear materially undervalued. We think the market is concerned about Bapcor’s turnaround and its timing, persistent weakness in retail, and share losses in trade.

  • But we think McKay is focusing on the right things: business simplification, cost reductions, and investment in the competitive advantages in trade, which underpin Bapcor’s narrow economic moat.
  • Bapcor is a fundamentally solid business, albeit in turnaround. Years of noncore acquisitions have been poorly integrated. This has introduced complexity and duplication to the neglect of the core trade business. Bapcor is now paying for these missteps

Between the lines: The potential for further skeletons in the closet is a concern. The inventory issues are the second such discovery of questionable operating practices following July’s disclosure that retained earnings were overstated by about $24 million over four years.

  • Individual discrepancies are historical and relatively minor. But the aggregate conclusion is a business with weaker earnings power than previously appeared to be the case.

Bapcor is a turnaround play

We expect Bapcor’s strong earnings growth to return as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor to continue to capture share in the fragmented trade market as it rolls out stores. We forecast a double-digit EPS compound annual growth rate over the next five years as the business recovers from trough earnings in fiscal 2025, improving same-store sales growth of around 2%-3% per year, and growing private-label penetration.

The automotive spare-parts industry is resilient. Automotive spare parts, required for routine maintenance and repair of vehicles, are less affected by changes in discretionary income and consumer confidence, and demand is broadly driven by the increasing pool of vehicles. We expect the number of registered vehicles to continue growing at a low-single-digit CAGR over the next decade, roughly in line with population growth. We estimate there are currently around 20 million passenger vehicles in Australia with an average age of about 11 years. We also argue an element of countercyclicality for auto parts. While maintenance can be delayed to some extent, it cannot be ignored completely. Conversely, we expect new-vehicle sales to slow in an economic downturn as consumers choose to maintain their existing car rather than upgrade to a newer vehicle.

We expect Bapcor’s trade business, which contributes the majority of earnings, to continue to capture market share. Bapcor’s trade store network underpins the firm’s narrow economic moat and affords the firm competitive advantages over smaller competitors. This network allows Bapcor to stock over 500,000 stock-keeping units, many of these slow-moving, for over 20,000 different vehicles—an offering that we believe smaller players will be unable to replicate. Bapcor is investing in this competitive position, targeting an increase in stores in Australia and New Zealand. We expect its new stores will come at the expense of competitively disadvantaged smaller players, which we anticipate will make up more than 40% of the market, due to Bapcor’s ability to provide parts to commercial customers more quickly, reliably, and at a lower cost.

Bulls say

  • The trade segment is highly fragmented, affording significant headroom for Bapcor to capture share at the expense of smaller players.
  • As vehicles become increasingly more complex, DIY customers could gravitate toward outsourcing to mechanic workshops—customers of Bapcor’s higher-margin trade business.
  • A strong balance sheet affords Bapcor the ability to execute its store network expansion and potentially pursue further accretive acquisitions.

Bears say

  • Electric vehicles present a longer-term threat to Bapcor’s business, as they have fewer moving parts.
  • Existing trade customer relationships could be difficult to replace, given their relative price inelasticity, damping Bapcor’s store network expansion plans.
  • A consumer shift to digital sellers (such as Amazon) or more competitive activity from the two larger players in the DIY segment could increase pricing pressure on Bapcor’s retail business.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.