There are good reasons why automotive parts company Bapcor (ASX: BAP) made its first appearance on Morningstar's Best Stock Ideas last month.

While the broader automotive industry faces the expanding threat of electric vehicles, the aftermarket automotive parts segment is more resilient, according to Morningstar equity analyst Daniel Ragonese.

This website has previously discussed potential ways investors can benefit from the shift away from internal combustion-powered vehicles toward electric-powered vehicles, and without buying Tesla or other direct shares.

However, as Ragonese's recent special report shows, there are also pockets of the automotive industry that will fare better than the traditional manufacturers themselves.

Bapcor--formerly Burson Group--is exclusively focused on the automotive aftermarket supply chain, including specialist wholesale, trade, retail, and service, in both Australia and New Zealand. This is a sector of the market about which Morningstar is optimistic, which underpins our narrow moat rating on the company.

The trade category of the auto parts industry can benefit from economic uncertainty, providing some downside protection for investors.

According to Ragonese, "do-it-for-me" sales in North America accelerated during the GFC, even as new vehicle sales came under pressure. "This reflects the counter-cyclicality of the trade segment…consistent with our view that amidst economic uncertainty, consumers are more inclined to delay a new vehicle purchase and instead prolong the life of their existing vehicle."

The above change in consumption patterns increases average expenditure on vehicle maintenance, which is a positive for auto parts demand, as a "trade segment is generally well-placed to benefit".

Ragonese sees this stability of demand for auto parts as one of Bapcor's most attractive characteristics.

"The industry has proven defensive, both domestically and offshore, even during more challenging economic conditions.

"Underlying demand is driven by the total supply of registered vehicles, which we expect to continue growing at a steady pace of around 2 per cent per year for the next five years."

This growth is underpinned by Australian Bureau of Statistics research, which shows Australia's population will grow steadily at 1.5 per cent

There were 19 million passenger vehicles as at January 2017, up 2 per cent on 2016, while the average age of vehicles is steady at around 10 years.

Since 2013, the pool of motor vehicles has expanded at a 2 per cent compound annual growth rate. "We believe that growth of lower-priced manufacturers including Mazda, Hyundai, and Subaru--which have all grown at between 4 per cent and 5 per cent--will support our revenue growth expectations.

"While Ford, Holden and Toyota have ceased manufacturing operations in Australia, we don't expect this to affect demand for aftermarket parts," Ragonese says.

He concedes the retail portion of the business, which comprises around 20 per cent of earnings, is somewhat exposed to online competition. "But we believe the trade-focused auto parts are relatively immune.

"The specialised nature of the products, extensive range of stock-keeping units required to service the workshops across the country, and the high level of service and specialised knowledge are difficult to replicate with an online model."

Reasons for this include:

  • Timeliness and availability of parts are the priorities for trade customers, as opposed to price.
  • Workshops need to be confident that parts are rapidly available.
  • Price is less of a concern, as the cost is typically passed through to the customers.

"Consequently, we expect online penetration to remain negligible, despite the arrival of Amazon. We believe this is the reason automotive parts isn't even among Amazon's top 10 categories in North America.

Further supporting factors include the convenient locations of stores, the technical expertise of staff, and its track record of meeting the needs of workshops,"which have all contributed to its intangible brand assets".

Bapcor was trading at $5.84 a share at the time of writing, below Morningstar's $7 fair value estimate.

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Glenn Freeman is a Morningstar senior editor, based in Sydney.

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