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Is the Bapcor Ltd share price a buy?

The Bapcor Ltd (ASX: BAP) share price is up by 10.7% over the past year, but it has been quite volatile in that time. It reached $5.01 in June 2017 and has regularly gone above $5.80. However, the price increase doesn’t mean it isn’t good value today.

Bapcor is Australia’s largest auto parts company, it runs the Burson and Autobarn brands as well as a number of other specialist businesses.

In its half-year (HY) report to 31 December 2017 it delivered continuing operations revenue growth of 41.6%, pro-forma earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 42.8% and earnings per share (EPS) growth of 36%.

This was a strong result, but there could be more growth to come. The management team at Bapcor have excelled at increasing profit margins at its old and newly-acquired businesses. Indeed, in the HY report the gross margin increased to 45.6% from 45% and the EBITDA margin increased to 11.4% from 11.3%. This is good news when the revenue is also growing strongly.

The biggest driver of earnings, Burson Trade, achieved same store sales growth of 3.4%. If like for like sales continue to grow above 3% then Bapcor should do well as it plans to increase the number of Bursons from 163 to 200 over five years.

I like that, theoretically, Bapcor’s earnings could increase in bad times because car owners will want to make their car last longer as opposed to buying a new one. If a part breaks the car owner is likely to use Bapcor’s service directly or indirectly through a mechanic.

Management said that it would have its first Asian store opened by May 2018 and the company is targeting five store openings during 2018. Asia is a very large potential market, so this could be a very good long-term move by Bapcor.

The company does have risks. Competitors are a relatively minor risk, but the shift to electric and automated cars could be a problem. Electric cars supposedly have less car parts, which likely will mean less parts need replacing. There is also a risk that the cars would be fixed by the car companies themselves.

Foolish takeaway

Bapcor is targeting continuing operations pro-forma NPAT growth of 30% for FY18. If it achieves this, today’s price could represent good value. Indeed, the company is only trading at 25x FY17’s earnings – PEG ratios of less than 1 are historically seen as attractive.

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Motley Fool contributor Tristan Harrison owns shares of Bapcor. The Motley Fool Australia owns shares of and has recommended Bapcor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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