ARB Corporation Limited (ASX: ARB) has some features that may appeal to an investor like Warren Buffett.
Who is ARB Corporation?
ARB Corporation is a $1.15 billion Australian company that manufactures automotive accessories. Specifically, they do accessories and bull bars for 4×4 vehicles (if you are American, read: trucks). ARB bull bars are seen as the market leader, rated highly for strength and design — and fetch a higher price. The company has manufacturing plants in Victoria and Thailand. ARB sells its products through third-party specialist stores and ARB-branded outlets. There were 58 ARB stores at 31 December 2016, 25 of them were owned by the company.
It generates around two-thirds of sales in Australia, with additional sales centres in the USA and Dubai. The company has an enviable track record of growth, with sales up almost 250% in 10 years and profit up 300% over that time. Dividends have followed suit.
ARB Corp Dividends
Would Warren Buffett buy ARB Corporation shares?
According to a BBC interview with Charlie Munger — Buffett's investing partner — in 2009, the duo uses a "simple" four-part investing checklist. Let's run ARB through that checklist.
1. They must be capable of understanding the business.
Basically, Buffett and Munger will only buy shares in companies that they know and understand. For example, it took many years for Buffett to buy shares of Apple Inc (they bought shares in 2016) despite repeatedly being called old-fashioned for ignoring the technology giant.
Given their experience investing in retail and manufacturing, I think Buffett and Munger could quite easily understand ARB's business. It gets a tick for this one.
2. The business must have a durable competitive advantage.
Buffett and Munger buy shares in businesses that can be held for the ultra-long-term, with the comfort of knowing that their company can withstand intense competition and potentially falling prices. That could be a result of their brand, market share, or something else 'intrinsic'.
ARB acknowledges the need for a long-term competitive advantage. That's why it invests heavily in the design of accessories and bull bars for new vehicles. It also brands all its products so people know they are buying quality ARB-backed accessories.
Although it is a small business by Buffett's standards, I think it would get a tick for this one, too.
3. Management must have integrity and talent.
You want good managers in charge of the businesses you own. One way I like to quickly assess management is by looking at per share returns, management tenure (i.e. how long they have been in the job) and ownership of company shares — the more they own, the better.
ARB Chairman Roger Brown, Managing Director Andrew Brown and Secretary John Forsyth have been with the company since 1987. Combined they hold around $250 million worth of shares.
It gets tick here.
4. No business is worth an infinite price.
Buffett has a habit of buying companies at seemingly great prices. He never rushes to buy when it's fashionable, he and Munger wait for the share price to make sense.
At today's prices, this is perhaps where a potential investment in ARB Corp falls down. At today's prices, ARB shares do not appear to be a bargain. The company could be expected to continue growing profits modestly and pay a bigger dividend. But I doubt Buffett would rush out and buy at these prices.
Foolish Takeaway
This is only a quick overview of whether I think Warren Buffett would buy ARB Corp shares based on the four-part checklist. Nonetheless, I doubt whether he would buy the company today despite its obvious potential.
