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Why you should buy ARB Corporation

ARB Corporation (ASX: ARP) designs, manufactures and distributes four-wheel drive accessories in Australia and overseas. ARB has been a stellar performer in the small-cap sector over the last five years, with the company’s shares increasing an amazing 323%.

ARB’s impressive history can be credited to an accomplished management team and superior product innovation, marketing, exporting and distribution network.

However, growth has slowed in recent times, and for the six months ended 31 December 2013, ARB reported a 3.6% fall in net profit to $20.1 million with revenue only growing at a disappointing 1%. On a positive note, cash flows from operations remained strong and the company has no debt.

For the FY14 half-year, the company experienced large declines in sales to original equipment manufacturers (OEMs) in Australia due to falling demand, and reductions in sales to customers associated with the mining industry. This was offset by an overall strengthening of sales to the Australian aftermarket and export sales assisted by the falling Australian dollar.

The disappointing result can be attributed to a large extent to the 41.5% fall in sales to OEMs. However with the OEM division only comprising a small 6% of ARB’s revenue and becoming increasingly less material to earnings, the result is not as bad as it appears on the surface. Importantly, the largest segment, the Australian aftermarket, which accounts for 70% of revenue, saw sales growth of 1.5%. Further, the exports division grew sales at an impressive 20.5%.

Despite the poor half-year result, the long-term looks bright for the company as it benefits from increasing demand for four-wheel drive vehicles and associated aftermarket demand products in Australia. ARB has expansion plans in place for Australia and overseas, with Australian warehouse capacity to be increased.  Demand from the Thailand plant continues to be strong. ARB continues to invest in research and development and expects new products to be released by the end of FY14.

The key negative risks to future growth are lower demand for four-wheel drive vehicles, an increase in the Australian dollar, rising steel costs, higher fuel prices and reduced consumer spending. The company has stated that the demise of the local vehicle manufacturing industry in Australia will have almost no direct impact.

Foolish takeaway

ARB is a wonderful business that is well managed and has grown earnings at an exceptional rate over the past decade. Despite earnings growth slowing in recent times, the company is set to benefit from increasing demand for four-wheel drive vehicles in Australia and overseas. It currently trades on a PE of 20 and is therefore not overly cheap, however investors willing to hold for the long-term will be well rewarded by management that consistently underpromises and overdelivers.

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Motley Fool contributor Bradley Murphy does not own shares in any company mentioned in this article. 

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