Has ARB Corp been oversold?

While ARB Corporation’s (ASX: ARB) share price soared during the lockdowns, amid surging demand for ‘offroading’ as Australians took to the open road as a surrogate for travelling overseas, the group’s share price has progressively unravelled over in the past year.

In short, the market simply doesn’t believe that the above-trend surge in consumption – which saw earnings jump 97% in 2021 and another 8% on top of that, in 2022 - as consumers raced to buy 4WDs to tour the outback – is sustainable.

The 'pulled forward’ by consumers, (aka the recent surge in consumption) is now expected to be followed by a plateauing in consumption as the market ‘digests’ recent purchases.

Assuming the return to international travel further exacerbates the return to trend, then ARB, along with other beneficiaries of the lockdown, may witness a swift correction in artificially high numbers.

Overreaction

While that may well be the case, the market’s overreaction to the resumption of more normal trading may have left the stock looking attractively priced.

With ARB’s share price down -50% from a high of $55, in January 2022, to $26.78 today, it’s now worth considering whether investor fear has left the stock looking decidedly oversold.

Given the strength of ARB balance sheet, (which includes precious little debt) and margins, the company looks well positioned to endure Original Equipment Manufacturer (OEM) – like Toyota Hilux and Ford Ranger – supply chain disruptions.

Due to the war in Ukraine, ARB flagged that OEM sales were 32.1% lower in the second half of FY22 and export sales in the second half of the financial year, which were -5.1% lower than the previous half.

Export upside

While supply will sooner or later return to normal, investors should note that 4WD parts and accessories are by no means the sum total of ARB’s business.

As a case in point, export sales now account for 38.7% of total sales, and in FY22 they grew by 17.4%.

While ARB will continue rolling out stores in Australia, exports are becoming an increasingly important part of the business and could eclipse onshore earnings over the next few years.

What brokers think

Based on Montgomery Investment Management’s numbers, investors buying shares today, are acquiring $6.81 of equity per share.

Consensus on ARB is Moderate Buy.

Based on Morningstar’s fair value of $31.53 the stock appears to be undervalued.

Based on the five stocks that cover ARB (as reported on by FN Arena) the stock is currently trading with 39.7% upside to the target price of $37.30.

Ord Minnett, which has a Buy rating and $39 target price, expects ARB to continue delivering reliable earnings growth and expects to continue posting above-average growth.

Despite concerns over whether earnings have hit a trough, Credit Suisse expects a muted recovery in FY23 and retains a Neutral rating, target price $34.

Despite caution around the short-to medium-term outlook, Citi retains a Buy rating and $46.63 target.

ARB Corporation's share price over 12 months.