The Bapcor Ltd (ASX: BAP) share price looks like it could be a buy to me. Bapcor is Australia's largest automotive spare parts company.
Here are a few reasons why I think it's a buy:
Defensive
You may not think of car parts as defensive, but actually it is quite a defensive business. When times get tough, people usually put off buying a new car, which AP Eagers Ltd (ASX: APE) and Automated Holdings Group Ltd (ASX: AHG) have actually reported recently.
However, people still need to drive a car so if a part breaks then they will have to replace it. This is where Bapcor, as the market leader of Australia, comes in.
Of course, car parts break all year round and in all economic conditions, so Bapcor generally has a solid source of earnings no matter what the economy is doing.
Impressive results
Bapcor has been achieving impressive results over the last few years as a result of good organic growth and acquisitions.
In its latest results to 31 December 2016 it reported that revenue grew by 34%, earnings per share grew by 21.2%, and the dividend grew by 10%.
I'm not expecting many more years of growth like that, but its recent acquisition of Hellaby's could see Bapcor have another couple of strong growth years.
Dividend potential
Bapcor has the potential to deliver investors a good source of income. Its dividend payout ratio for its results to 31 December 2016 was 57%, which is quite low for an Australian company. This suggests management are confident there is a lot more growth to fund from earnings.
The grossed-up dividend yield is 3.09%, which is quite low but already better than what you could get at the bank. Plus, if the dividend keeps growing at more than 10% a year for a few years then investors will be very happy.
Risks
Bapcor has risks just like any other business.
Internet retailing could be a possible cause for concern, management will have to work hard to keep prices as low as they can be for customers.
There is also a lot of uncertainty for some businesses surrounding electric and automated cars. It's hard to say how much this will impact Bapcor.
Foolish takeaway
Bapcor is currently trading at 30x FY16's earnings. This is quite expensive, but I think the growth Bapcor may achieve should justify it. I'd be quite comfortable buying around $5.25, but a lower price is always better for returns and a margin of safety.
