The ARB Corporation Ltd (ASX: ARB) share price has been racing ahead in recent years, as can be seen in the chart below.
ARB share price
Over that time, its dividends have driven higher, with yearly payments rising 240% to 31.5 cents per share. In addition, it has paid more than $1.50 per share in special dividends.
If this company isn't on your ASX watch list already — it should be.
Who is ARB?
Established by Anthony Ronald Brown (ARB) in 1975, ARB has grown to become Australia's leading bullbar and 4×4 accessories manufacturer and distributor, respectively.
With its global head office and manufacturing plant in Victoria, ARB has established and maintained its reputation of quality, reliability and practicality.
The company's key advantage is its size and focus on design. Australia's car market is one of the most competitive of all developed markets, with new models and even brands hitting the showrooms and highways each year.
By nature, this presents a key challenge for new entrants who do not have the research team's, experience, engineers or manufacturing plants like ARB or its number-one competitor, TJM.
In fact, ARB's manufacturing plants in Kilsyth and Thailand are currently running at full capacity because demand for new designs has exceeded supply. The company is now moving to a new facility in Melbourne's eastern suburbs and will expand its Thai facility to reduce the bottleneck.
Having a facility in Thailand — which is run by Australian engineers trained in the Melbourne plant — enables ARB to distribute its product overseas with ease. It also allows the company to get access to Thai-built utility 4×4 makers like Isuzu, Suzuki, Toyota and Holden.
In the USA ARB has two distribution centres and it has just opened shop in the Middle East following the success of its Prague (Czech Republic) establishment. Furthermore, the company recently began expanding its research & development (R&D) team in the USA.
But ARB is not some one-trick global growth pony. ARB is also expanding its local footprint, where it has a growing store network. Of the 58 ARB stockists, 25 are company-owned. In addition, the company sells its products to new vehicle dealers and fleet providers for off-the-shelf modified vehicles.
The company also has its fingers in a number of pies via ownership stakes in or partnerships with other businesses. For example, it owns the Thule brand of utility canopies and Smart Bar. It also distributes Hi-Lift Jacks, Warn winches, Safari snorkels, IPF lights and more.
Pleasingly, the company is in a net cash position — it has no debt. Its strong balance sheet leaves room for acquisitions.
ARB plays on the rise of both new vehicle sales and the popularity of utility vehicles.
Management
At the wheel of the company is Roger Brown as Chairman and Andrew Brown as MD. Both have been with ARB for 30 years and own around $113 million of shares a piece. Excluding Independent Director Adrian Fitzpatrick, who was appointed this financial year, the average tenure of ARB directors is nearly 23 years.
The company knows its key advantage is the size of its research and development team, and their experience. ARB's bull bars are designed with safety and looks at the forefront. A team of 40 R&D engineers work to design and manufacture the latest products for the world's 4×4 community.
Why I can't buy ARB shares
ARB shares look expensive to me. Don't get me wrong, I think it is a fantastic business with an enviable long-term track record. But, at today's prices, you'll have to pay up for the right to own ARB shares.
Indeed, it trades on an enterprise value (EV) to operating profit (EBITDA) ratio of 15 times, which is too high for me. That translates to a price-earnings ratio of 23 times. For a (crude) comparison, shares of GUD Holdings Limited (ASX: GUD), a $1 billion accessories business, currently trade for an EV/EBITDA ratio of 15 times and a price-earnings ratio of 21 times.
Foolish Takeaway
It's tough to find a good business like ARB for it only to fail a valuation screen. However, I think there are elements to ARB's business that are cyclical, which could provide an opportunity for savvy (read: patient) investors. Indeed, while its sales actually grew by double-digits during the GFC, its share price still fell 30%!
ARB, I'll be waiting.
