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3 reasons why the Bapcor Ltd (ASX:BAP) share price could be a strong buy

The Bapcor Ltd (ASX: BAP) share price has risen by 25% over the past year to $6.68, with the last two months delivering most of those gains.

Bapcor is Australia’s leading auto parts company with its Burson and Autobarn chains.

However, I believe that there could be a good amount more growth to come for three main reasons:

Valuation

Bapcor is currently trading at 28x FY17’s earnings, yet it’s predicting that net profit after tax (NPAT) will grow by 30% in FY18 compared to FY17.

It’s quite rare to find a defensive, growing business with a PEG ratio of under 1.

The company may deliver a positive earnings surprise to investors at the result and beat expectations.

Organic growth

The company is growing all segments of its business quite pleasingly. The company recently confirmed that Burson Trade same store sales growth is around 4% year to date and Autobarn same store sales growth is more than 2%.

Same store sales are growing and Bapcor is also growing the number of stores. There are currently 163 Burson stores and management want to increase this to 200 over the next five years.

It has 124 Autobarns and wants to increase this number to 200 over the next five years as well.

The company wants to increase its ‘own brand’ percentage of sales, which should increase profit margins.

Bapcor is extracting synergies from its business, which is growing the profit margins. In the half-year result to 31 December 2017 it reported that the gross profit margin increased to 45.6% from 45% and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased to 11.4% from 11.3%.

Asia

The company is now expanding into another continent by growing into Asia. It should have opened its first store in May and plans to open an additional five stores by December.

At the moment this is a very small part of the business, but if it goes well then it could open up a  large avenue for future growth.

Foolish takeaway

Some investors do point to future problems for Bapcor like Amazon and electric vehicles. But that’s more of a problem down the line, not now, and Bapcor management believe they have a strategy to adapt.

Although Bapcor isn’t as good value as it was a couple of months ago, it could still be a market-beater over the next few years at the current price.

Want some more market-beating ideas? These top stocks are all predicted to deliver good growth for shareholders.

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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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