When it comes to valuing and investing in companies, the long-term direction of the business matters a lot more than a single quarter or year of data. Nonetheless, fresh operating results give our analysts a chance to see how things are progressing. And, in some cases, adjust their view of a company and its Fair Value.

In the coming week, dozens more ASX listed companies will release their latest results to investors. This includes three companies that our analysts take a very different stance on to the market. Let’s take the shares in the order of when their results are due to come out.

Reece Ltd (REH)

  • Star rating: ★
  • Economic Moat Rating: No Moat
  • Fair Value estimate: $13.50
  • Share price August 16: $27.08

Australia’s largest bathroom, plumbing and HVAC supplies retailer reports earnings on Monday August 19.

Reece’s domestic business includes over 600 locations across Australia alone, serving plumbing trade customers as well as DIY consumers. Reece has also invested heavily to enter the US market in recent years through the acquisition of Morsco’s plumbing business in 2019 and four smaller companies since. This has given it a network of around 250 stores in the US’s Sunbelt region.

In her research on the company, Morningstar’s Esther Holloway stresses that Reece’s domestic and US businesses are very different.

In Australia, Reece benefits from having almost three times the number of stores than its closest competitor. This means that Reece’s customers often have a location nearby and that items can be transferred quickly between stores. Reece can therefore provide parts to its customers in a timelier manner than smaller competitors, even for slow-moving items. Reece’s brand recognition in Australia also supports sales of its higher-margin own-brand items.

Reece does not benefit from these advantages in the United States. Reece is a small player in the US with four times less stores in the Sunbelt region than narrow-moat Ferguson. Reece’s US stores are also spread out over a large geographic area, reducing its ability to move stock between stores as quickly as it can domestically. In addition to this, Reece does not yet enjoy the brand recognition that supports highly profitable own-brand product sales in Australia.

Holloway thinks that Reece’s lack of competitive edge in the US is shown by its lower profit margins relative to Ferguson and its own operations in Australia. While she expects Reece to keep growing its market share in Australia from its current level of around 40%, she does not expect margins to increase much from their mid-teens level. Likewise, she thinks that the US’s highly competitive market and Reece’s lack of clear advantages will prevent it from increasing profit margins there.

Reece appears likely to continue investing in the US Sunbelt, a market that management see as having stronger growth prospects than Australia. But Holloway thinks it is unlikely for them to find bargain acquisitions in the country given that its larger competitors Ferguson, Hajoca and Winsupply are all following similar roll-up strategies. Combine this with Reece’s weaker competitive position in the country and she feels that returns on investment in the US expansion are likely to remain subdued.

At a current share price of around $27 and a price-earnings ratio of over 40 times, investors seem to be more optimistic on Reece’s growth prospects in the US than Holloway is. Her Fair Value estimate of $13.50 puts the shares firmly in one-star Morningstar rating territory.

Bapcor (BAP)

  • Star rating: ★★★★★
  • Economic moat rating: Narrow
  • Fair Value estimate: $7.30
  • Share price on August 16: $4.95

Bapcor sells replacement vehicle parts to trade and retail customers.

Through its Burson segment, Bapcor is Australia’s second biggest trade parts supplier with around 180 locations across the country. This and other trade businesses make up around 80% of Bapcor's earnings. The other 20% come from its retail business, where its AutoPro and Autobarn brands give it roughly 12% of Australia’s retail parts markets. This makes it Australia’s third biggest player, ahead of several far smaller businesses.

Concerns of a slowdown in Bapcor’s retail business and the bungled replacement of former CEO Noel Meehan have weighed on Bapcor’s stock in recent months. Private equity group Bain tried to take advantage of this with a low-ball takeover offer. However, this bid was dismissed and Bapcor filled the vacant CEO position with former 7-Eleven Australia leader Angus McKay.

Morningstar’s Angus Hewitt thinks that Bapcor’s long-term outlook is more promising than markets are giving it credit for.

He views demand for automotive spare parts as being relatively defensive given that vehicle maintenance can be delayed but not ignored completely. In an economic downturn, more people may even opt to maintain their existing vehicle rather than buy a new one. Demand for Bapcor’s products is likely to be impacted mostly by the size of Australia’s vehicle pool, which Hewitt expects to grow at a low-single-digit annual rate over the next decade.

Hewitt’s optimism on Bapcor largely stems from his expectation of further market share gains in its trade business. Bapcor's scale and number of locations allows it to provide a much broader range of parts more quickly and more reliably than smaller peers. As these smaller firms make up an estimated 40% of the Australian market, there could still be plenty of share to take. More Burson store openings could compound Bapcor’s advantage and spur further earnings growth over the coming years.

Morningstar’s Fair Value estimate of $7.30 per share is almost 50% higher than the current market price. As a result, Narrow Moat Bapcor commands a five-star Morningstar rating.
Ahead of the company’s earnings release on Wednesday, Hewitt stressed the importance of longer-term dynamics over a single period of data. In keeping with his long-term thesis on the company, though, he singled out Bapcor’s trade market share as the trend he’ll be watching most closely.

Domino’s Pizza Enterprises (DMP)

  • Star rating: ★★★★★
  • Economic moat rating: Narrow
  • Fair Value estimate: $58
  • Share price August 16: $33.53

Domino's Pizza Enterprises is the Australian master licence holder of the Domino's Pizza brand. It also has operations in New Zealand, Japan, Singapore, Malaysia, France, Germany, Belgium, Luxembourg, Taiwan, Cambodia, and the Netherlands.

Domino’s shares have been hit hard since 2021. As well as concerns about a weaker consumer, cost pressures have squeezed profitability across the food service business. This has reduced profits for Domino’s franchisees and led to slower store openings. It has also eaten into profits at company owned locations, which make up around a quarter of the firm’s total store network.

Domino’s investors then faced a further blow in July as the company announced the closer of several locations in Japan and France to improve per-store profits. That news led Morningstar’s Johannes Faul to cut his forecast for Domino’s rollout to 5,900 stores by fiscal 2033, but that still implies 30%+ growth in Australian locations over that period and even more growth elsewhere.

Faul also cut his Fair Value estimate for the shares to $58 – a level considerably above today’s price. Ahead of results on Wednesday, Faul said that he’s especially interested in how strong trading has been in Domino’s Australian business. This could reveal to what extent Aussie consumers have pulled back on fast-food spending, or indeed spent more while trading down from more expensive options. A key indicator will be Domino’s same store sales, which measures the revenue from locations that have been open for more than one year.

Domino’s enjoys several competitive advantages that underpin Faul’s Narrow Moat rating. These include the globally recognised Domino’s brand and the company's ability to spread its marketing and innovation spend over a far larger base of locations than smaller peers. Indeed, Domino’s is a leader in restaurant logistics and has developed technology tools that build and maintain customer engagement and loyalty.

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Further reading on these companies and earnings season:

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.