It has been 24 years since Australia's last recession, but there are plenty of signs that our long lucky streak may be coming to an end. Prices for our biggest exports have plummeted, mining investment is tumbling, and the dollar is falling faster than a drunk koala. But surely there are plenty of companies that can do well in tough times? Of course, nothing can be guaranteed to be completely recession proof – but there are steps you can take to set your portfolio up to combat the impacts should an economic downturn arrive on our shores
The truth is, recession-resistant businesses are tough to find. Some products will see a lot of units sold — people still need cereal after all — but will face margin pressure as consumers downgrade to cheaper brands and smaller sizes. When times are tough, those home brand 'Wheat-Bricks' suddenly look a lot more appetising.
So to single out the best recession-resistant business models, Motley Fool Pro took a look at how different US-listed companies performed during the Global Financial Crisis. A few industries caught our eye, but one in particular stood out: Auto-parts. All of the largest US listed auto-parts suppliers that we looked at actually increased their revenue each year throughout the GFC.
But how does that help Australian investors? Enter Burson Group (ASX: BAP).
Burson: recession ready
Burson Group is Australia's largest trade-focused auto-parts distributor, with 121 stores nationwide. It won't be a household name for most Australians because the company's focus isn't do-it-yourselfers. Instead, around 80% of Burson's revenue comes from selling auto-parts to more than 30,000 independent auto-repair workshops, with the remaining 20% coming from retail purchases direct from their warehouse shop-fronts.
Burson Group's resilience comes from the nature of its product. Consumers will put off a lot of expenses during tough times, but when their car breaks down they need to get it sorted out pronto. That makes for some steady revenues. And during recessions, consumers tend to put off upgrading to a new car and instead spend more on keeping their existing ride running. A double win for Burson.
Pricing power
One more reason to trust in Burson is the company's ability to pass price increases from parts manufacturers onto its workshop customers, who then pass the costs on to drivers like us. Burson can pull that off because when workshop customers need a part, they need it right now.
In its latest half year results, Burson faced increased costs from suppliers of around 3% due to the falling Aussie dollar. How did Burson respond? They simply passed these higher costs straight through to their own customers, the workshops. Burson even later added their own additional price increase to reflect general cost inflation (and improve margins) of around 2-3%. Nice – especially as CEO Darryl Abotomey says "It has not decreased volumes one little iota".
And remember, the auto-parts themselves are usually less than half the cost of the repair job. Put it all together and this pricing dynamic is one more reason why Burson wins during tough times.
Foolish takeaway
The Reserve Bank might have been worried enough about an Aussie slowdown to cut interest rates, but Burson has just keep on truckin'. In its latest half year results, Burson posted strong results — same-store-sales growth of 4.3%, total revenue growth of 9.7%, and a net profit boost of 14.3%.
It's hard work finding a truly recession-resistant business, but Burson measures up. When you need a repair done, you need it done fast, giving Burson strong pricing-power. Even better, during a recession penny-pinching consumers tend to stretch out the life of their existing cars, instead of upgrading to a new ride. Investors looking for a way to prepare their portfolio for a recession should make a pit stop at Burson Group.
