Bapcor (ASX: BAP) downgraded earnings guidance again, with the core trade business to blame. The company now expects fiscal 2026 underlying net profit of $44 million-$49 million, down 17% at the midpoint from guidance given in October.

Why it matters: We lower our fiscal 2026 net profit forecast by 24% to about $46 million, a 43% decline on last year. Our fiscal 2027 net profit forecast reduces by 18% to $69 million, mostly due to a more protracted turnaround. We no longer expect a dividend this year.

  • The downgrade centers on the trade segment. Bapcor’s other businesses are tracking expectations. Notably, the troubled retail business has returned to revenue growth in recent months.
  • Compared with last year, tools and equipment sales have declined. The company is also cutting trade segment prices in response to competitive pressure. While this is weighing on margins, we think it should allow Bapcor to regain recent market share losses.

The bottom line: We lower our fair value estimate by 6% to $4.70 per share. Shares in narrow-moat Bapcor appear materially undervalued. We think the market’s main concern probably echoes our own: the timing and certainty of the turnaround.

  • Bapcor’s turnaround is proving longer and more painful than we (or management) anticipated. But we think management is focusing on the right things: cutting costs, simplifying a business that has become bloated with noncore acquisitions, and returning focus to the core trade segment.
  • The company is also in discussions with lenders. This seems to suggest that it could get precariously close to debt covenants. By our numbers, Bapcor should stay below estimated net debt/EBITDA covenant levels of around 3. However, the risk of an equity raise at current depressed prices has risen.

Coming up: Fiscal 2026 earnings are set to be heavily skewed to the second half, consistent with prior guidance. Bapcor expects first-half underlying net profit of $5 million-$8 million.

Bapcor’s trade network returns to focus

We expect Bapcor’s strong earnings per share growth to return as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor to resume share gains 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 2026, 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.