Why I’m not buying ARB Corporation Limited

Has the bull bar maker driven into a brick wall?

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Bull bar and 4WD accessories manufacturer ARB Corporation Ltd (ASX: ARP) has an outstanding track record of growing profits and earnings over many years.

The company has delivered average annual returns to shareholders of 18.6% over the past ten years. That might not sound like much, but that’s a 457% return, if dividends were reinvested since August 2004.

So why wouldn’t I be buying shares now?

Good question and glad you asked.

Firstly, based on 2014 financial year earnings, ARB is trading on a P/E ratio of 22.1x. That’s expensive for a company that has delivered growth in net profits of 1.7%, 10% and just 0.5% in 2012, 2013 and 2014 respectively. Sales growth has also slowed, rising by 8.5% in 2013 and 2.2% last financial year.

In fact, sales growth appears to have stalled, and it remains to be seen whether ARB can return to double digit growth in future. With 69% of sales coming from the Australian aftermarket category, ARB is being hit by the slowdown in the resources sector. And with resource investment yet to bottom out, substantially growing sales is going to be one tough gig.

In fact, the company agrees, stating that “the current economic environment remains challenging”.

ARB also has 50 retail stores in Australia, with 21 owned by the company and the remainder franchised, but unfortunately the company doesn’t provide details of same-store-sales. As such, ARB is exposed to lower consumer confidence, which has affected many retailers recently, including Super Retail Group Ltd (ASX: SUL), Kathmandu Holdings Ltd (ASX: KMD), Reject Shop Ltd (ASX: TRS) and Pacific Brands Limited (ASX: PBG).

I can’t imagine that many resource workers, particularly those in mining services companies, are rushing out to buy new bull bars and canopies for their utes.

Exports will likely hold the key, currently representing 23% of total sales last financial year, and growing by 14%. To further facilitate growth, ARB has established a warehouse facility in Prague in the Czech Republic and a second warehouse in Jacksonville, Florida.

In summary, ARB, which has long been a market darling, is overpriced and any misstep is likely to be heavily punished by the market.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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