Analyst insights: 2 ASX stocks to buy in 2023
Morningstar's Angus Hewitt identifies two undervalued companies with a competitive edge and strong prospects for 2023.
Mentioned: Bapcor Ltd (BAP)
Angus Hewitt: So, if we look at a few specific sectors, on the automotive side, we've got semiconductor shortages really looking like they're going to be persistent at least throughout halfway through 2023, and that's constraining new car sales. But this lack of supply and really strong demand means that dealers don't need to discount, and they're experiencing exceptional profitability. But as these semiconductors come back, new car supply should recover. And we'll see that new car sales are actually quite sensitive to tough economic conditions. And this demand might be dropping around the same time that supply is coming back, which is not spelling a good scenario for new car dealers.
On the other side of this is, as people forego buying new cars and instead choose to maintain their existing cars, automotive parts are actually really defensive. They're pulled along by the fleet of cars on Australian roads, which is much less susceptible to new car sales, and maintenance and failure-related parts expenditure is much more defensive compared to new car sales. We've also got tourism coming back. So, this is really good for casinos, but it's also good for airlines. Demand is outstripping supply for air travel as well. So, it's a bit constrained with getting enough capacity back into the market due to either labor shortages or even just inefficiencies in recommissioning mothballed aircraft. And so, we've got full planes, high ticket prices and really good profitability for the airlines as well.
InvoCare (IVC) is a company we really like. It's one of few companies in Australia we assign a wide economic moat, and that's really underpinned by its intangible brand assets and cost advantages over a long tail of smaller companies in what is a highly fragmented industry. InvoCare is a funeral services company. And on the volume side, we've seen deaths lower since the onset of COVID restrictions, lockdowns, people just washing their hands has meant flu cases are lower, COVID cases are being kept down, and deaths actually fell below trend. On the price side, we've seen restrictions on funeral attendance has meant that people are foregoing the more expensive funerals and opting to go towards a cheaper funeral, with maybe streaming services. We've found that as restrictions ease, people are actually coming back to these more expensive funerals pretty quickly. So, the demand is definitely still there. And then, on the volume side, we're seeing as restrictions ease, flu season has come back in 2022, COVID cases are obviously back, and we've seen deaths are actually above trends now. And that's what's happening in the short term. Longer term, we expect deaths to be a function of demographics – so, life expectancy, population size and average age. And we expect deaths in Australia to increase over the next decade at about 2% to 3% per.
The second pick on my list is Bapcor (BAP). So, this is an automotive parts company, which I did discuss about a little earlier. It's also a company we likely think it has competitive advantages. It's a narrow economic moat. We assign it a narrow economic moat. And this is based on its cost advantages. It's able to supply parts quicker. It's able to supply parts more reliably. It's got a better breadth of parts compared to a lot of smaller competitors. And it's able to do all this at a lower cost. We estimate about 40% of the automotive parts industry in Australia is made up of much smaller players that can't compete with this sort of scale. So, we expect Bapcor to continue to capture share in this sort of market. And it is a really defensive market. We estimate there are about 20 million cars on Australian roads with an average age of about 11 years. And while new car sales can fluctuate, this is really solid and really consistent, and Bapcor's target market is cars over five years old. So, even if there are pretty rapid changes in the composition of new cars, that will take several years for it to flow through to Bapcor, giving them a lot of visibility.