Bullbars and 4WD accessories distributor ARB Corporation Limited (ASX: ARP) has seen its share price close up 5.9% today, after reporting a 0.2% increase in earnings per share for the latest half year.
It may just be me, but I can't understand what all the hype is about.
The company is trading on lofty P/E multiples above 20x earnings, yet is applauded by investors for a 0.2% increase in earnings per share? And it's not like the company pays a huge dividend yield – it's just 2.3% currently.
I'd suggest that investors need to take a closer look at the most recent results.
Revenues were up nearly 11% to $164.7 million, but net profit only rose 1.6%, which suggests that that management are struggling to contain cost increases and maintain margins. ARB's net profit margin dropped from 13.6% last year to 12.4% in the last half.
Indeed, the company says, "…above average increases in employee, distribution, marketing and information technology expenses resulted in constrained profit growth."
Unfortunately, they don't say why those costs are rising. ARB does note that the mining slowdown has affected sales in some regions, so potentially that is a contributing factor, but it appears that a 22% rise in advertising expenses, 13% jump in staff costs and a 20% increase in 'other' expenses are mostly to blame.
What is a concern is this is not the first time profit margins have been hit. Last year, ARB Corp saw revenues rise 1%, but profits fell 3.6%. Over the five years through to 2014, the company posted 14% plus profit margins, but ARB may be entering a period where it struggles to meaningfully grow earnings. The company also acknowledges that fluctuating exchange rates are also causing it problems.
For investors, that means ARB is unlikely to outperform the market, and if you are trying to beat the market, then an investment in ARB is probably not for you at this stage.
As an aside, if you aren't trying to beat the market, you may as well buy an index fund like the SPDR S&P/ASX 200 Fund (ASX: STW).
You may also want to note that ARB's share price has gone nowhere over the past 2 years – suggesting the market has picked up on that potential lack of growth. ARB's share price deserves to re-rate back to more normal levels given the lack of earnings growth and falling profit margins.
