Why the ARB Corporation Limited share price could rev up in 2018

The share price of ARB Corporation Limited (ASX: ARB) has revved up after management delivered a profit result that was comfortably ahead of its guidance.

The stock jumped 2% to its highest level this calendar year of $18.90 during lunch time trade when the 4-wheel drive accessories maker reported a 10.9% increase in pre-tax profit to $35.7 million as sales accelerated 12.4% to $208 million for the six months to end December 2017.

Management had initially forecast a 10% increase in its interim pre-tax profit and the better-than-expected result was achieved despite the weak US dollar (which is dragging on the company’s export business), a $800,000 relocation expense for its new headquarters and an additional $15 million investment in inventories to drive sales growth.

Its export business is the star of its results with that division recording a 20.2% sales growth, compared to 10% for its Australian Aftermarket business and 7.6% growth for its Original Equipment Manufacturer (OEM) business.

But don’t thumb your nose at the OEM result. The growth is great news considering this business had been under a cloud in the previous year and management is working on a number of new contracts that will boost its performance in FY18 and beyond.

While its statutory net profit growth of 0.4% to $23.5 million may look anaemic, it has been impacted by tax provisions. Without this one-off expense, net profit would be up a respectable 13.4%.

Investors will also be happy with the increase in ARB’s interim dividend to 17.5 cents from 16 cents although management gave a somewhat mixed outlook.

Sales in the first six weeks of the second half continue to grow but ARB warned that economic conditions in its main markets are unpredictable over the medium-term and that the volatile currency will add to the uncertainty.

However, given ARB’s solid track record in growing shareholders’ wealth (I rate management as one of the best in the small/mid cap space), I think investors should give management the benefit of the doubt.

The stock is not a bargain buy by any stretch of the imagination, but quality stocks always command a premium.

Shares in ARB are up by just over 20% over the past 12 months compared to the 2.6% gain by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) and the performance of its peers like AMA Group Ltd (ASX: AMA), which is up 7%, and AP Eagers Ltd (ASX: APE), which is more than 10% in the red.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ARB Limited. 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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