Many investors have been looking for opportunities to invest in companies that may benefit from measures announced in last week's budget. ARB Corporation Limited (ASX: ARB) might fit the bill.
The immediate tax deduction for small business purchases up to $20,000 is expected to create significant retail activity. The cuts to small business tax rates and a 5% tax discount for sole traders should also have a positive impact on a wide range of retail businesses.
ARB Corporation designs, manufactures, distributes and sells four-wheel drive vehicle accessories with manufacturing plants in Victoria and Rayong, Thailand. ARB Corporation has warehouse and sales centres located in Australia, Thailand and the U.S., as well as distributors in over 100 countries worldwide.
ARB Corporation should benefit from the budget as small businesses and sole traders like builders, plumbers and electricians increase spending on work vehicle accessories. This is likely whether they are upgrading existing vehicles or accessorising new vehicles.
Of course a potential increase in business as a result of budget changes is not a reason in itself to go out and buy ARB Corporation or any other company. However, a more in-depth look at the financials of the company suggests it may be worth an investment.
One advantage ARB Corporation has is no debt. In uncertain economic times, low debt is one of the more important qualities to look for before investing in a company. Profitable companies with low amounts of leverage are more likely to survive any future 'black swan' events like the GFC. They are also more likely to maintain dividends through downturns.
ARB Corporation currently trades on a price-to-earnings ratio of about 23.5. While certainly not cheap, it is probably a reflection of consistent growth in earnings over many years. It also has a long record of dividend growth.
Other metrics are strong too, with an operating margin of over 20% and a return on invested capital of over 22% both suggesting a healthy company.
The dividend yield is low at 2.1%, but given that a lot of earnings generated by the business have been used to pay off all debt, yield may well increase in the medium term.
Looking at free cash flow and earnings, I think that ARB Corporation is near fair value currently. Nonetheless it is a company with potential to benefit from the effects of the budget. It is debt-free and has a solid financial record.
While finding companies that are trading at a deep discount to value is always my primary aim, buying shares in really good companies at a fair price is not a bad thing.
On this basis, I believe ARB Corporation is worth considering as part of a diversified portfolio of quality companies.
