Why is nobody talking about this gem of an ASX 200 stock?

The Bapcor Ltd (ASX: BAP) share price may be a strong performer in 2023 because of the economic conditions. I think the S&P/ASX 200 Index (ASX: XJO) stock could be an underrated opportunity.

For readers who don’t know, Bapcor is an auto parts business with a number of different businesses including: Burson Auto Parts, Precision Automotive Equipment, BNT (NZ), Truckline (heavy commercial vehicles) and WANO (light commercial vehicles), Autobarn, Autopro, Midas, ABS, Shock Shop, and Battery Town.

It’s diversified across the automotive industry.

The Bapcor share price has dropped close to 10% over the past year. And there’s good reason to think that the company can outperform the ASX 200 in the coming months.

A downturn may not be bad news

Bapcor is a major seller of auto parts. It’s possible that a downturn will lead to a lower level of purchases of new cars.

But people still need to drive, and vehicles can still break down. Rather than buying a new car, more people may choose to go with fixing the vehicle with a new part. A downturn could mean stronger demand for many Bapcor businesses.

When the business gave an investor presentation in November 2022, it said that it had seen ongoing positive revenue growth despite lower market growth amid cost-of-living pressures in the retail sector and the New Zealand economy.

However, the company did say that it’s experiencing a temporary profit margin compression because its price adjustments lag the cost inflation that it’s seeing.

The current profit forecast on Commsec suggests the ASX 200 stock’s earnings per share (EPS) will be flat in FY23, at 38.7 cents. Then, it could grow EPS by 12% to 43.5 cents in FY24 and grow again by 19% to 51.7 cents in FY25.

Those projections would put the Bapcor share price at under 17 times FY23’s estimated earnings and at 12 times FY25’s estimated earnings.

Profit improvement potential

Bapcor has a program called ‘better than before’ where it aims to increase its net earnings before interest and tax (EBIT) by at least $100 million, enhance the return on invested capital (ROIC), and improve the company’s organisational health.

It’s going to achieve this in a variety of ways, including increasing internalisation of spending, supply chain optimisation, increasing the proportion of private label sales in certain categories, and consolidating supplier spending across the business for better pricing and rebates.

If the business is able to increase its presence in Asia, it could unlock a good source of new earnings in a large population region.

Profit growth could also enable the dividend to keep growing. It has increased its dividend every year since FY15. By FY25, it could be paying an annual dividend per share of 29.3 cents – this would translate into a grossed-up dividend yield of 6.5%.

Foolish takeaway

I think the ASX 200 stock is on track to grow its earnings in the coming years, which I think is promising for the Bapcor share price to rise in the future.

I’m not sure how the business will perform in the distant future when there are a substantial amount of electric vehicles on the road but in the next few years, it could still do well.

The post Why is nobody talking about this gem of an ASX 200 stock? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Bapcor. 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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