Every month, our analysts update their list of best Australian equity ideas for Morningstar Investor subscribers.

Two members of that list, Bapcor (ASX:BAP) and Domino’s Pizza Enterprises (ASX: DMP), reported earnings this week and continue to trade significantly below our estimate of Fair Value.

Let’s take a look at how each company fared, and what our analysts think matters in the long run.

Bapcor

  • Economic moat: Narrow
  • Fair Value estimate: $7.30 per share
  • Share price August 22: $5.04
  • Star Rating: ★★★★★

Bapcor sells replacement vehicle parts to trade and retail customers. Through its Burson segment, Bapcor owns 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% of Bapcor’s earnings come from its retail business, where its AutoPro and Autobarn brands give it roughly 12% of Australia’s retail parts market. This makes it Australia’s third biggest player, ahead of several far smaller businesses.

Bapcor shares have been weak lately due to concerns over cyclical headwinds for its retail business and the bugled replacement of former CEO Noel Meehan.

While the vacant CEO position has now been filled, fears for the retail side of things appear to have been justified. Bapcor’s 2024 results showed a 27% decrease in the retail earnings before interest, taxes, depreciation and amortisation ("EBITDA"), hit by a slowdown in higher margin sales of discretionary products (like speakers and roof racks) and competition from the likes of Supercheap Auto.

These difficulties in Bapcor’s retail business led management to write down the value of this segment, and this pushed the company’s reported result to a $158m loss. Adjusting for this, the company’s underlying profit for the year declined 24% to $95 million – marginally lower than our analyst Angus Hewitt’s forecast.

The long-term view for Bapcor

There is no getting away from the fact that 2024 was a tough one for Bapcor. But Hewitt is confident that things can improve from here. He expects demand for discretionary goods to revert to trend levels in the longer term and underlying automotive spare parts demand—the bulk of earnings—to remain resilient.

More importantly, he thinks that Bapcor still has an attractive opportunity in its core trade parts business. The scale of Bapcor’s network enables it to supply a wider range of often slow-moving parts more quickly and at a lower cost than smaller competitors. As a result, Hewitt expects the firm can continue to capture market share in this business as it rolls out new stores.

In addition to a recovery in discretionary retail demand, Hewitt thinks this can underpin 5% average revenue growth and double-digit earnings growth over the next five years. Hewitt thinks Bapcor can keep more of its revenues as profit thanks to operating leverage in its trade store network (as fixed costs are spread over more strores) and increased own-brand product sales.

Hewitt left his Fair Value estimate of $7.30 per share unchanged after Bapcor’s fiscal 2024 earnings. At a recent price of around $5.04, the shares traded at a material discount to this level and commanded a five-star Morningstar Rating.

Domino’s Pizza Enterprises

  • Economic moat: Narrow
  • Fair Value estimate: $58 per share
  • Share price August 22: $31.03
  • Star Rating: ★★★★★

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 reported earnings for fiscal 2024 were broadly in line with the expectations of Morningstar’s Johannes Faul and other analysts. But the shares fell after the results as management reported softer than expected trading in the first few weeks of fiscal 2025.

Faul thinks this is most likely due to a more protracted recovery in Japan and France, where Domino’s has about 40% of its stores and declining profits have offset solid performance in other key countries like Australia and Germany.

While the firm’s underwhelming start to the new financial year is the latest of several setbacks for Domino’s shareholders, Faul has held his Fair Value estimate at $58 per share.

Faul thinks the market is extrapolating the current weakness and underestimating the massive long-term growth potential of Domino’s global network, which he expects to approach 6,000 stores by fiscal 2034 from a current level of under 4,000. Improving sales at the individual store level above inflation is key here as franchisee profitability is the key driver in growing the store network and ultimately earnings.

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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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.