Why these brokers think ARB shares are still a buy after their big crash

The 4WD accessories maker has endured a horror week, but brokers see blue skies ahead.

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Key points

  • The ARB share price crashed to a more than one-year low today following its disappointing trading update
  • Earnings momentum is slowing due to supply chain disruption and labour shortages but some brokers think the longer-term outlook still looks good
  • Citigroup and Wilsons have reiterated their buy recommendation on the shares

The ARB Corporation Limited (ASX: ARB) share price tumbled again today but some experts reckon this is a buying opportunity.

Shares in the four-wheel-drive accessories maker lost a further 1.13% today as they crashed to a more than one-year low of $33.23.

Today’s losses are on top of the 11.2% fall yesterday after the company’s disappointing trading update. It also follows smaller falls on Monday and Tuesday, meaning the ARB share price has slumped 17% since Friday’s close.

ARB hits earnings speed bump

The update showed slowing sales momentum in the quarter ended March across all segments when compared to the first half of 2022.

Importantly, a further slowdown is likely at the group level in the current quarter based on management’s FY22 guidance, according to Citigroup.

However, the broker isn’t put off and has reiterated its “buy” recommendation on the ARB share price.

“While slowing sales momentum is not positive for a stock which trades at an above-market multiple, we see attribute the slowdown to supply issues which should resolve in time and see demand holding up for now,” said Citi.

But this doesn’t mean it’s a smooth road ahead for ARB either. Supply chain disruptions continue to impact new car sales, labour shortages to install ARB accessories are still an issue, and rising interest rates could dent consumer demand.

However, Citi thinks the ARB share price still looks cheap. Management’s decision to double the capacity of its Thai manufacturing plant and its partnership with Ford give the broker reasons to feel confident about ARB’s future.

Nonetheless, Citi lowered its 12-month target price to $46.63 from $48.15 a share.

ARB share price can overcome temporary obstacles

Another broker that believes the ARB share price is looking cheap is Wilsons. It repeated its “overweight” recommendation on the shares with a 12-month price target of $43 a share. That implies a more than 30% upside if dividends are included.

“Demand remains strong, underpinned by a ‘consistently high’ order book and, in our view, the ongoing structural shift to 4X4s/SUVs,” said Wilsons.

 “Once supply constraints ease and supply chains improve, we expect structural sales growth to resume and note the incremental distribution capability available through ARB’s global collaboration with Ford.

“Recent price increases and favourable currency movements should support elevated margins in the near-term.”

The ARB share price has reversed over 11% in the past year compared to a 4% increase in the S&P/ASX 200 Index (ASX: XJO).

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ARB Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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