ARB Corp

For many years, we’ve known that ARB Corporation was an exceptional little business. But it's not so little anymore and the stock is now on the radar of many fund managers and other investing publications—the secret is out and the price is up. Some of them, looking through the rear view mirror it seems, see nothing but further upside. In contrast, we have some concerns. While we have great faith in management’s ability to execute on issues within its control—including matters like the current expansion of the Thailand facilities—it’s the bigger picture where our concerns lay.

The company has been a clear beneficiary of the mining boom and, more generally, the increasing trend toward four-wheel drives and 'pickups' over the past decade. The SUV subcategory can’t grow faster than overall car sales forever, and so part of the tailwind behind ARB is sure to disappear. And if the mining boom ends badly, sales growth will be impacted more severely. Perhaps we’re not the only ones with such concerns. We note that in August the controlling Brown brothers sold 15% of their holding and long standing executive director John Forsyth sold a little more than 20% of his large holding, both at $9.70 per share. Your analyst sold some of his long-held stake recently too, though continues to retain a weighting to the stock well in excess of our recommended portfolio limit of 5%.

At the recent annual meeting, management confirmed that sales for the first quarter of 2013 were up 10%. That should lead to more than 10% profit growth if the trend to continues. But we’d add two points—the comparable period last year was still weak as a result of the 2011 Japanese earthquake (which severely impacted delivery of new four-wheel drives to Australia), and the current period probably includes some pent up demand after the Thai floods further halted sales from late 2011. We’re not sure the 10% growth is indicative for the year and years ahead.

The share price is up 16% since ARB Corp: Result 2012 of 15 Aug 12 (Hold – $9.21) and is now within spitting distance of the downgrade prices in the attached recommendation guide. While those prices remain unchanged for now, we’ll think long and hard before actually downgrading this little gem. Worries aside, the business is likely to be bigger and better in a decade than it is today. HOLD.

Note: The model Growth portfolio owns shares in ARB Corporation.