ARB Corporation Limited: 1 share you’d LOVE to buy but shouldn’t

Source: ARB Annual Report

The ARB Corporation Limited (ASX: ARB) share price could do one of two things over the long-term:

  • Soar
  • Fall

“Well, that’s obvious”, I hear you say.

Let me explain.

I believe shares in Australia’s leading distributor of bullbars and select automotive accessories will be more valuable in the future than they are today.

However, I think ARB shares are expensive. That means, I think we will get a better opportunity to buy ARB shares in the future.

Why you would love to buy ARB

  • It is Australia’s best bullbar company, with customers paying a premium to have Australian made and designed safety equipment on their vehicles.
  • It has international markets in its sights. ARB has already established its presence in the US following its success in Europe. It is opening shop in the Middle East, too.
  • It is a family business. Forget founder-run, family-run businesses are often even better to own because it’s not only about profits, but the legacy and la familia.
  • It pays a great dividend. While the current dividend yield isn’t anything to write home about, it’s steady and growing.

Why you shouldn’t buy ARB

  • Shares are a little on the nose. The ‘price-earnings’ ratio of ARB shares is 26x. That’s not a valuation measure I’d hang my hat on, but it tells you that investors think ARB shares are worth more than, say, the broader market. For example, the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) average price-earnings ratio is 17.5x. Clearly, ARB’s success is no secret.
  • Discretionary spending is vital to ARB’s profits. Think about it, who buys bullbars? Blokes and sheilas that love a bit of mud, soccer mums and dads, mining companies, farmers and those preparing for a zombie apocalypse. Now ask yourself, how many of them need to buy bullbars? The zombie brigade and farmers, maybe. But a lot of ARB’s customers could forgo a $2,000 accessory if they, say, fell behind on household bills. Finally, will ARB’s profits fall if the sale of new cars retreats from the recent record-high levels? Most probably.
    In my opinion, a fall in sales would only be temporary. But if you have it baked into your valuation of ARB shares, the current price is a little too high to call it a bargain.

Foolish Takeaway

ARB is one of the best companies on the ASX, and if I were forced to choose between it and a cheap but poor quality business I’d go ARB ‘erryday’ — as the kids would say.

Indeed, I think the ARB share price will be much higher 10 years from now. However, no one is forcing us to buy anything. Therefore, I’m holding off for a more compelling entry point.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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