The Bapcor Ltd (ASX: BAP) share price is up 6.3% in three weeks, here's why I think it could keep going upwards.
Bapcor is the largest automotive parts business in Australia. It owns the Burson Auto Parts brand and several other more specialised automotive parts businesses. It also owns the retail chain Autobarn.
Here are three reasons why Bapcor could be a good addition to your portfolio:
Defensive
Cars don't decide to break down on any particular day or in a certain economic climate. Car parts need to be replaced all year round. This gives Bapcor constant revenue as mechanics need the parts quickly.
In a downturn people are more likely to use Bapcor's services because they're trying to make their cars last longer. Buying a new car is a much more expensive option.
Expanding
Bapcor management have done a great job of adding bolt-on acquisitions to the business and optimised them to increase the profit and profit margins.
The larger Bapcor gets the stronger its economies of scale become and it can use that to attract customers or increase the bottom line.
Hellaby's
Bapcor recently took over Hellaby's in New Zealand, which was a great acquisition because of the similarities between the two businesses.
Bapcor management have already identified millions of dollars that can be saved or created over the next few years with some changes. The acquisition could substantially increase the earnings per share over the next few years.
Risks
One main risk to Bapcor is the change to electric and automated cars. There may be less parts that need replacing in electric cars than petrol cars so that reduces the overall potential market. However, Bapcor only needs to achieve what Bunnings has done and be the clear winner to stay ahead of the game. Plus, electric cars will have parts that need replacing too.
Online retail is the other main risk with Amazon opening here soon. I think it will take Amazon a long time to achieve the size and scope of Bapcor's network. Bapcor delivers items to mechanics in two hours – perhaps this can be improved even further in time.
Foolish takeaway
Bapcor is trading at 31x FY16's earnings with a grossed-up dividend yield of 2.97%. This next result could be a bumper one because of the Hellaby's acquisition and profit margin improvements.
I think Bapcor can play a good part in a diversified portfolio but I wouldn't be confident to hold it for more than a decade at this stage.
