Since listing in May 2014, shares of Burson Group Ltd (ASX: BAP) have risen by more than 144% and have outperformed the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) by a lazy 148%.
The company's potential as a great investment didn't go unnoticed by a number of Fools and regular readers were made aware about this here, here and here.
The question for investors now is – can the share price continue to climb from here or are the shares due for a correction?
This question is simply impossible to answer accurately without the help of hindsight, so instead here is a list of pros and cons investors could consider when thinking about Burson Group:
Pros:
- Burson has grown into one of Australia's largest suppliers of automotive aftermarket parts and services and this has allowed it to develop competitive advantages through scale and size.
- The company now operates in over 600 locations throughout Australia and this allows it to target a broad range of customers at the same time as commanding serious purchasing power from suppliers.
- The business is largely defensive and often regarded as 'recession proof'. Consumers will often choose to repair their cars instead of purchasing a car, especially during tough economic times.
- Burson has shown it has the ability to pass on rising costs to customers rather than absorbing them. As much as consumers hate paying for repairs when they go to a mechanic, they are generally left with no option but to pay what is quoted for both the parts and labour.
- As Australia's population continues to grow, the number of cars on the road is also increasing. This is obviously an important tailwind for the company.
- As the slide below illustrates, the company has a diversified set of operations, which means it is not reliant on one particular division to drive growth and earnings.
- Burson currently has 15 'optimisation projects' aimed at delivering improved efficiency, and as outlined below, this is expected to deliver real financial benefits from FY17 and onwards.
- The short term growth outlook is very positive. The company expects FY16 NPAT to come in around $41.5 million – $43.0 million. If achieved, this would represent annual earnings per share growth of between 24.5% and 29%.
Cons
- The first obvious negative for investors is the current valuation. If the company delivers NPAT of $43 million, the shares are still currently trading on a price to earnings ratio of more than 28. This doesn't leave much room for error if something does go wrong.
- In order to fund recent acquisitions, the company has taken on more than $133 million in debt.
- Burson's retail segment does face competition from the likes of Supercheap Auto owned by Super Retail Group Ltd (ASX: SUL).
- Some investors may be put off by the low dividend yield which is currently less than 2%.
Foolish takeaway
Just by comparing the pros (of which there were many more I could have included) and cons, it is pretty clear to see that Burson has a lot of attractive features going for it.
It is arguable whether or not the shares offer good value at the moment but I have little doubt that the shares will be worth significantly more in five years from now.
