Hello @zaidi675 I expect that ARB has current (trailing)...

Hello @zaidi675

I expect that ARB has current (trailing) earnings power to current market cap (about $1,500m, @ $18.9 per share) of about 3.1% or 3.2% (1). Or said differently, I think ARB is generating a trailing earnings yield of about 3.1% to 3.2%.

If I assign some value to franking credits (2) then I'm willing to say that ARB is currently generating a trailing somewhat grossed up earnings yield of about 3.4% to 3.6%.

With a 5 year view of growth, I expect a prospective earnings yield (similarly grossed up) of somewhere between 4.9% and 6.3% (3).

However, to assign no value to growth beyond year 5, for one of the greatest compounding machines in Australia, would be completely unfair. Without getting into a lot of detail, if I assume that each dollar retained by the company generates about $1.7 dollars of value, then I get that the total prospective return (including growth beyond year 5) is somewhere in the range 6.1% to 7.9%. I think of this as an expected return of about 7.0% (the mid point), with a somewhat pessimistic prospect of only 6.1%.

I don't think that's a terrible prospect, especially when I think about the capital gains tax I will incur when I sell (which I did when I sold a little about 6 weeks ago). But I also don't think it's a particularly enticing prospect.

I think if I could purchase ARB with an expected return of about 9.5% and a somewhat pessimistic return of at least 7.0%, then it would be an attractive prospect. To achieve this, according to my numbers, we would require a share price of about $13. This price would correspond with a trailing earnings yield of about 4.7% (a PE of about 21).

Cheers, Mars


(1): This is based on cash earnings (ie after expensing all R&D), and is based on earnings from sales only (which is how I usually like to think about earnings).

(2): Though not acknowledging the full face value of them. After all, who knows how much longer we will have the benefit of a full tax refund on imputation credits.

(3): This is what I call the present value of earnings, divided by the current market cap (hence a "yield"), with a 5 year view (so ignoring any growth beyond year 5). So it can be thought of as a prospective return which ignores the value of any growth beyond year 5.