Our family’s second car had its first breakdown in 12 years. Apparently, a fuel-pump valve wore out, causing the car to jolt a little for several months, before conking out.
Thankfully, the breakdown occurred outside our house, albeit when I was running late for a story interview. A call to a roadside-assistance provider was answered immediately and a mobile mechanic arrived within 15 minutes that morning.
Unable to fix the problem, he organised a tow truck, which arrived within the hour and ferried the car to our local mechanic. The car was fixed by mid-afternoon and I drove to my rescheduled interview later that day. The turnaround was less than six hours.
Perhaps I got lucky and called on a quiet day. But the efficiency of the car-part supply and service chain, at least for this breakdown, impressed. How many other industries provide such responsive service and quick turnarounds when products fail?
It’s not altruistic. Fixing broken-down cars faster allows providers to service more vehicles and maximise revenue. My local mechanic had dozens of cars waiting to be repaired and a workshop that seemed to stock few parts.
What are the chances of a small local mechanic shop carrying a fuel-pump valve for a 12-year-old Nissan that is seen less on roads these days? The part, like most these days, was ordered thorough a specialist supplier and delivered onsite within hours.
Think about that process for a moment. Not having to carry parts relieves the mechanic of a huge cash-flow burden. The focus is on fixing cars; parts are ordered for “just-in-time” repairs and consumers pay the mechanic well before the supplier is paid.
Receiving parts from a specialist supplier allows the mechanic to service a wider range of cars and quick parts delivery means more cars can get through the workshop each day. That means more revenue opportunity for the mechanic and presumably better margins for the specialist supplier, which can source parts for less.
That brings me to Bapcor, a leading car-parts supplier and favourite small-cap stock of this column. After soaring price gains over the past three years, Bapcor has drifted lower in the past 12 months, thus creating an opportunity for patient investors.
Bapcor (then known as Burson Group) listed on ASX in April 2014 at $1.82 a share in an Initial Public Offering (IPO). Burson soared to $6.30 in mid-2016 as the market recognised the full value of its network and potential for faster earnings growth.
I first alerted Bapcor to The Bull’s readers at $2.17 in July 2014 in a story on “three top speculative IPOs” and have stayed positive on the stock ever since.
Bapcor drifted to $5.26 this month in a rare bout of price weakness. Like many star growth stocks, the company was caught up in the broader sell-off in small-cap industrial stocks as fund managers took profits and rotated into large-cap cyclicals.
There has been no fundamental news about Bapcor to justify such a price correction. Some fund managers believe it has been caught up in broader hype about Amazon setting up in Australia and making life unbearable for bricks-and-mortar retailers.
This fear looks overstated. For starters, four-fifths of Bapcor’s revenue comes from trade customers. I cannot see too many retail customers in the remaining fifth rushing to order car parts from Amazon, which is expected to focus on other products at the start.
Bapcor’s strongest competitive advantage – its relationship with mechanics across Australia – is a huge barrier to entry for rivals, including Amazon. Such relationships are not easily replicated or substituted with products sourced through other channels.
I wonder about the level of price sensitivity with parts, given mechanics pass the cost on to customers, and whether quick parts service is the key part of the mechanic value proposition.
Leading small-cap fund manager Pengana this month estimated that Bapcor trades on a Price Earnings (PE) multiple of about 16 times FY18 earnings, its lowest valuation multiple recorded. That’s despite the well-run company providing guidance for the robust earnings growth to continue.
Bapcor offers defensive earnings – people still need to repairs cars in a slowing economy – and can grow organically through store rollouts.
The long-term theme of fast population growth leading to more cars on the road, and more traffic congestion and car usage, is good news for a leading car-parts supplier. Sadly, we are spending more time in cars and having to service them more often, even though there are fewer breakdowns because of improving car quality.
I noticed my local mechanic sources parts from Bapcor. Seeing the supply chain in action was further evidence that Bapcor’s rally has more miles in it yet, albeit at a slower pace.
Technical analysts will look for Bapcor to hold above $5 – a price point that has had previous market support. My hunch is the company will be re-rated when full-year earnings are released in August and the market realises it has over-reacted.
Chart 1: BapcorSource: ASX
• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at June 6, 2017.