Test-drive Super Retail Group, ARB and Supply Network

The ASX All Ords Index (ASX: XAO) continues on sideways, winding a little above 5000, but automotive parts industry companies ARB (ASX: ARP), Supply Network (ASX: SNL) and Super Retail Group (ASX: SUL) are all currently testing all-time highs. Before you buy, you should take a test drive too.

Super Retail Group runs Supercheap Auto, offering auto supplies and accessories at 289 stores nationwide. Analyst forecasts have the company increasing earnings by about 80% over the next two or three years, and that is why the PE ratio is roaring at 28. Hitting a high in May, it is currently retesting it, and if it breaks through, it’s hard to say where it will stop. This is not a bargain stock, but you would be buying for high performance.

Revenues and net profits have roared upward steadily since 2004, not even taking a rest stop during the GFC. Along the way, it picked up sporting goods stores Amart All-Sports and Rebel Sport and branched out into boating and camping by starting BCF and buying other camping businesses. Australians’ love for motoring, the outdoors and sporting are all wrapped up here.

Return on equity is strong at 12%, and even though net profit margins are about 5%, by constantly growing and acquiring companies, 5% of a bigger and bigger pie is a pretty big number itself. If it doesn’t smash the $13 resistance level, it may take a side road down to its $11 support price. That would be a better price for when it makes new all-time highs.

ARB specialises in four-wheel drive parts, accessories and off-road products. With less than half the market capitalisation of Super Retail Group, it still satisfies another Aussie passion, and that means great profit margins and steady customers. It has no debt and profits haven’t stopped growing. Its current ratio (current assets/current liabilities) is a rock-solid 3.3, meaning it can cover short-term liabilities easily with cash and inventories.

Since Jan 2012, it has more than doubled in share price, and it also is ready to go off-road above its $14 resistance level. With a 24 PE, it may be comparably of better value, but not being as much a diversified business, it may not weather a downturn as well as Super Retail.

Lesser known Supply Network Limited has gone up four times in the past three years. Definitely the smallest company of the three at a market cap of $57 million, it is like the super-charged race bike tearing up the track. Under the Multispares brand, it supplies aftermarket commercial vehicle parts to Australia and New Zealand.

Sales have increased by 50% since 2009, profits have more than doubled in the same time. Return on equity was a screeching 24%, however its net profit margins were only about 6%. Because it sells the parts that you may not see or know by name regularly, it doesn’t attract a high margin. They just need to keep selling more and raising revenue to win this race.

Currently at about a 14 PE ratio, the company announced last month that its forecast earnings for the year should be $67 million in sales (up 11.6%) and $4.5 million in net profit (up 13.6%). The share price has pulled back to $1.20 recently, but now it is halfway in its trading range, and on its way to its all-time high of $1.90.  Even though forecast earnings look good, I would wait until either it breaks $1.90 confidently, or retests its $1.60 support level.

Foolish takeaway

You are catching these three companies at the starting gates of a high octane race. My value investor heart says go with great performance at fair prices — Supply Network. With a large market to expand into, it has more opportunity to grow, and so does its share price. You have to keep up on the company’s story to make sure it stays steady in its business, and be ready on a pull-back in price.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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