"For if they can establish their brand in Europe and/or the US, and other markets, that has a modicum of the strength that it has in Australia, then they have an incredibly bright future."
That, right there, is the essence of the investment thesis.
I think that looking at vehicle sales data in Australia, and how it ebbs and flow over various mining, infrastructure, or agricultural cycles was probably an appropriate way to identify the earnings drivers of the business back in the 2000s, but I don't think it is very meaningful today given the global beachhead that the company has established [*].
Besides, over the years so many things have been said and written about market shares of various vehicle types and makes, and how these are trending, and how close they are to some deemed point of saturation, and yet ARB just keeps on growing sales and profits.
I remember when I first came across ARB (in the mid-1990s, I think): all it made and sold, I recall, was bull bars. And I thought to myself, "This is rubbish; it's just metal bashing. How much margin can possibly be garnered from doing this on a sustainable basis?"
Years later, when I finally purchased my first ARB stock at a substantially higher price (they were making tow bars, canopies and roof racks). Today, they supply all of these, as well as (takes a deep breath):
- Air Lockers (whatever they are... something to do with differentials) including associated accessories such as Diff Breather Kits, Adjuster Nut Pliers, Shim Driver Sets, Differential Spreader Kits, Bearing Puller Kits (again, not too sure),
- Compressors (again, with all manner of accessories),
- Suspension Systems
- Fuel and Water Tanks
- Fridges and Camping Accessories
- Vehicle Lighting Systems (Spotlights)
- Safari Snorkels
- Drawers and Cargo Storage Gear
- Batteries and Chargers
- Recovery and Medical Equipment
- Radios
- Sidesteps
- Apparel
[Do yourself a favour: flick through an ARB catalogue (available online). You might find yourself surprised at the range of stuff they sell.]
And that's what I think many people, who have over time thought the growth was unsustainable, have missed: the ability for ARB to roll out new, high-margin products that leverage off its existing respected brand. I don't quite understand it myself, because I am not a motor enthusiast (despite - or maybe, because - my father was a motor mechanic), but I know that people who are passionate about their 4WDs spare no expense at buying toys and accessories for them.
(Of course, there is a risk of diminishing returns when it comes to rolling out too many SKUs, and I'm a bit wary of that, but that's a separate discussion.)
The point is, ARB's growth isn't just about vehicle numbers in Australia. It is also about all the array of "stuff" that go onto those cars.
And, from recently, it is also about how ARB's brand becomes recognised and accepted abroad.
Because if they are half as successful in Europe and the USA, as they have been in Australia, then at some stage down the line they will generate more sales internationally, than domestically (currently about one-sixth of their sales is derived from the US and Europe - and, importantly, very little profits - come from selling into their international markets).
If that happens, then in ten years' time, Revenue of $1.0bn is eminently conceivable, which would translate into in excess of $220m of EBIT and NPAT in excess of $160m (3.5 times higher than today's level.)
If I was to place my trust in any company and management team to achieve that outcome, then ARB would be it.
Yes, I know this is the stuff of blue-sky thinking, but it is based on precedent.
And yes, I know ARB looks - prima facie - very expensive.
But that's what I've hear a wide array of people - even smart ones - saying for years.
All I know is that every February and July, when I study ARB's result announcements, the operating and financial performance is flawless, and the strategic story is the same as it was the last time they reported.
And the time before that.
And the one before that.
And before that one.
And...
And...
And...
etc.
[*] I think that BRG is a good leading analog for what ARB is going through. BRG spent several years and lots of money trying to gain traction for its brand in the US and the UK. When the breakthrough was finally made, and the product gained market acceptance, BRG's international sales and profits soared. And so did the share price. (And brand-wise, ARB's brands are, I feel, far more resilient brand than BRG's products, with far longer product obsolescence cycles, and ARB operates in a far less competitive business environment. And ARB is better managed, too... not the BRG management is poor - it's actually good; its just that ARB's is exceptional)
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