ARB Corp: Tough times, but positioning for growth

ARB's growth has hit the wall, but they are hoping it's just a blip on the path of this long-term investing winner.

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ARB Corporation Limited (ASX: ARP) today released an update for the nine months to March 2012.

There was nothing really surprising about the results, given the tough retailing conditions and the strong Australian dollar, which affects the company's export earnings. Overall sales growth was up 3.5%, including growth of 9% in the US (in US dollar terms).

The high US dollar affects both sides of ARB's business, with imported components and products from Thailand, China, the US and other countries being cheaper. This is offset by lower Australian dollar income, as exports are more difficult to achieve. A lower US$ to A$ exchange rate would be of great benefit to ARB, as it looks to grow its exports.

Steel is the major raw material for much of ARB's product range, and steel prices are at comparable levels to last year. Much of ARB's product is linked to mining industry growth. Medium and large SUV's (Sports Utility Vehicles) and 4WD vehicles are used extensively to move personnel and smaller equipment to and from large mining sites.

The fact that 30% of new cars sold in Australia are 4WDs certainly helps ARB and this has been on the rise since 2007.

Growth Strategy

Despite 2012 looking like the first flat year of profits for ARB, the company has a number of strategies in place to grow in future years.

The company plans to open new stores over the next few years, with 2 planned in the next 5 months.  They believe that there are still parts of Australia where ARB products are under represented.

ARB has added new warehouses over the last three years, but capacity is limited, so the company is considering additional warehousing around Australia.

The company is building a new 17,500 sq metre manufacturing facility in Thailand, which is expected to be complete in the first half of 2012/2013. The facility will provide room for a new international distribution warehouse and increased manufacturing capacity.

New products are constantly being developed. As new model 4WD vehicles are released around the world, ARB expands its product development to cater for these vehicles.

The Foolish bottom line

ARB is forecasting to report sales up by 4% and a flat profit for the twelve months to June 2012. Earnings per share and dividends are expected to be in line with last year. While conditions are tough at the moment, ARB is positioning itself for growth in future years, and 2012 should be a blip in an otherwise stellar growth story.

Net profits have grown by an average compound rate of 18% per year for the last ten years. Currently trading on a P/E of 18.4, the company looks to be trading around fair value.

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Motley Fool contributor Mike King doesn't own shares in ARB. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).

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