Fears concerning the coronavirus have been looming over the share market in recent weeks, causing ASX defensive shares to be particularly in vogue.
With that in mind, let's take a look at an S&P/ASX 200 (INDEXASX: XJO) stock often considered to have a defensive revenue stream: Bapcor Ltd (ASX: BAP).
What the numbers say
Bapcor's FY19 results were in line with guidance, which saw revenue up 4.8% to $1.3 billion, earnings before interest, tax, depreciation and amortisation up 9.8% to $164.6 million and net profit after tax up 9% to $94.3 million, all on a continuing operations basis. While these were all record figures, they represent a slowing rate of growth in the business.
During the FY19 investor conference call, Bapcor CEO and MD Darryl Abotomey attributed the slowing growth to softer market conditions. Abotomey went on to say the conditions were the most challenging the company had faced since listing on the ASX in 2014.
Abotomey also flagged market competitiveness (such as from the likes of Repco) and a high proportion of immature loss-making Autobarn stores as further detractors.
During the period, 18 company-owned Autobarn stores were added. Of these, 10 were new or 'greenfield' stores while the remaining 8 were franchise conversions. As a result, 49% of Autobarn stores are now company-owned (66 stores out of 134). This is a notable increase from the 25% proportion at the end of FY17.
Defensive revenue streams and industry tailwinds
It is often said that Bapcor has defensive earnings and as such, may be a stock to own during a recession. The thinking goes that during a recession, people are more likely to fix their current car rather than buying a new one. This benefits a company like Bapcor, which operates across the whole automotive aftermarket vertical.
In Bapcor's 2019 half-year report, the company highlighted some notable industry figures. For one, the average age of registered vehicles in Australia in 2018 was 10.1 years. More recent data from the Federal Chamber of Automotive Industries' VFACTS report showed 1.06 million new vehicle sales in 2019, down 7.8% from 1.15 million sales in 2018.
This would suggest there's a lot of servicing and repairing required to maintain the national fleet and with new vehicle sales slowing, fewer new cars should make for more frequent servicing.
The core Burson business
Bapcor is more than just a big box retailer of spare parts. In actual fact, the company's bread and butter is trade services through its Burson brand.
The trade business gives Bapcor a surprisingly strong competitive advantage. For example, most mechanics won't drive to a store to source parts in their own time, nor will they buy parts online. It's easier and more efficient for them to rely on the experts at Burson.
In effect, a mechanic's business is built on having a specialist auto parts company available, which is why most Burson stores are within a few minutes' drive of most mechanics.
Having a technical relationship means the conversation between Burson and the mechanics is often about the service and reliability of products — and not price.
Industry disruption
The aftermarket auto parts industry could be structurally impacted by shifts towards electric vehicles (EVs), autonomous driving and ride-sharing.
The rise of each of these 3 movements could be harmful to Bapcor's operations. This is because they each have the potential to shrink the company's addressable market by way of fewer petrol-operated cars on the road. In addition, EVs typically require less maintenance from a mechanic as they have fewer moving parts.
The renowned player in the EV space, Tesla Inc (NASDAQ: TSLA), released its Q4 update to the market earlier this week. The Tesla share price notched a one-day gain of 20% on the back of record vehicle deliveries and revenue and earnings that came in well ahead of market expectations.
Despite this growth, as Bapcor's management continues to convey, it could be a long time before EVs are the standard vehicle driving on our roads.
Foolish takeaway
Since EVs could be many years away from structurally impacting Bapcor's business, the company's Thailand expansion may be a more pressing concern for investors. After opening its first Burson store in Thailand in FY18, the rollout is taking longer than expected due to delays in store refurbishments and supply chain issues.
That being said, industry tailwinds and the defensive characteristics of Bapcor's revenue streams certainly make an investment in this aftermarket specialist a compelling case.
