A useful Arb…
Amid news of Qantas’ latest conniptions and Spain’s arrival on the set of the great euro drama (Italy and France to enter stage right shortly), one Aussie company is quietly going about its business.
That business is ARB Corporation (ARP), and its compelling fundamentals are the reason we have held the company’s shares in the Montgomery Private Fund since inception.
Those fundamentals have also helped to produce acceptable results for Montgomery investors (See Figure 1) amid an otherwise manic, depressive market.
Guided by its founder, Roger Brown, ARB designs, manufactures and distributes accessories for 4WD and light commercial vehicles – something it has focused on solely and successfully for almost as long as I have been alive.
And while producing and selling accessories for 4WDs doesn’t sound like an overly exciting business, consider the fundamentals over the past 10 years.
Since 2002, ARB has managed to grow its after tax earnings from $8.36 million to $37.8 million – a compound growth rate of 18.25% per annum. This is a fantastic achievement and largely organic because it has required just $133.5 million of retained profits and equity – the latter from the issuance of options.
In 2002, $8.36 million profit was generated on $31.2 million of shareholders’ equity, generating a return to owners of 26.8%. Fast forward to 2011 and returns are equally impressive. $37.8 million is being generated on $129.3 million or 29.2%. Many businesses have also grown their profits over the same period of time, but it is far more often that growth has been ‘acquired’ and declining return on equity suggests those acquisitions have been expensive.
Fig. 1 Results are net of all fees.
As the business has grown and developed its economies of scale, returns have actually improved. This is a rare achievement in practice and a development which creates significant value for shareholders.
If you were a part owner of the business in 2002, your shares would have grown steadily in value (not share price) from $1.91 to $8.09. If you believe Benjamin Graham’s observation that in the long run, the market is a “weighing machine’, then you must agree that prices follow valuations over the long run. Provided you can see which businesses are able to increase their per share intrinsic value, there is no longer any need to try and predict share prices! Simply buy high-quality businesses – with rising intrinsic values – at discounts to that intrinsic value.
Figure 2 reveals the change in the ARB’s valuation mapped against its share price over the last decade.
Fig. 2 Skaffold Line ARB and its Intrinsic value 2002-2014*
*Source: www.Skaffold.com 2012-2014 valuations are estimates
(If you have been thinking about becoming a Skaffold member, having a chart like Fig 2 above for every listed Australian company and a chart that is updated automatically and daily coming up to a Greek election, a Spain bailout and a very crucial reporting season is more than just a little helpful. I find it essential. So if you are thinking about a membership to Skaffold, go to www.skaffold.com and take advantage of the 13-months-for-the-price-of-12 “It’s Time” celebration promotion (and be sure to chat to your accountant about any pre-June 30 tax benefits)).
This represents a total value increase over the period of 353.93%. Including $1.76 in fully franked dividends, the business has generated a total return over the past 10 years of 446.1%. Suddenly selling bull bars gets a whole lot more exciting doesn’t it?
Fig. 3
ARB Corporation’s rising valuation and share price clearly reflect the high-quality nature of the business and superior investment fundamentals. You can understand why it’s something we have been attracted to for some time.
Last week we asked whether Thorn Group’s (TGA) recent outperformance was sustainable. The reason to ask is because it’s not the results of the past that will deliver returns to new shareholders, but whether the future matches that which is currently estimated.
To some extent, this question was answered for ARB by its management at the start of May – “The Board expects sales for the full year to be up by about 4% and for profit after tax to be in line with the previous year.”
While it is a slightly disappointing development – the market was expecting more – we think that any growth sans acquisitions in the current economic climate is not something to sneeze at. The business has faced challenging conditions this year following the Japanese earthquake, tsunami and Thailand floods, which together dramatically impacted the supply of new 4WDs. The key risk ahead is what proportion of their sales is impacted by declining iron ore prices feeding into a lower level of capex by mining companies.
Conversely, there is pent-up demand from a lack of vehicles being available for sale in the first half. May car sales data continued to show a strong rebound and indeed a record 38,000 new 4WDs sold out of a total 96,000 in total new cars in Australia. A record and, of course, ARB’s most important business segment.
Add to this the associated pent-up demand of accessories to fit out these new vehicles and what ARB is faced with is a current order book heading into the last three months of the financial year where demand is outstripping supply. An enviable position to be in.
Coupled with a highly capable management team who have not only controlled the businesses operating expenses at a time where sales and revenues were severely impacted, but have also used their conservatively managed and high quality balance sheet to continue expanding their production and distribution capacity to support future growth plans, we think the business has not hit its straps. And remember there are less than 50 stores worldwide.
Until our view changes, which is currently unlikely, this remains to us a business that is already succeeding in expanding overseas, a business that we will happily hold and a business for whom any share price weakness (provided intrinsic value’s remain unchanged) is a signal to accumulate more.
Posted by Roger Montgomery, Value.able author, Skaffold Chairman and Fund Manager, 14 June 2012.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
William A
:
Hi Roger
Hope you are well.
This is unrelated to ARB, given the announcement today, I hope you’ll not get many backlash from blog participants who bought SWL.
Certainly does not look good at all. But again, this is where asset allocation plays an important role in investing. I hope no one put a house on SWL.
All the best
Roger Montgomery
:
Indeed. Agree with you there William. You might recall we have written our thoughts about engineers and contractors. We don’t hold SWL.
Mike Sloan
:
Roger, Middleton also says “The rate at which ARB Corporation continues to adapt to its environment suggests that it will be a substantially different business in twenty years’ time”. Of course the nature and performance of that substantially different business will be very much dependent on who is leading it. Given the plaudits ARB continually receives from the investment community, I would have thought fund managers, professional analysts etc would have been queing up at G Brown’s door in an attempt to gain an understanding of how the business functions internally and the personalities that are driving it. Have you (or your staff) ever requested an interview with Mr Brown or a company representative?
John
:
Where do ARB’s moats lie?
John C
:
Hi John – I think ARB (ASX: ARP) have a lot of competitive advantages, some of which I’ve listed below in response to Prerak’s “ARP vs. Company B” comment. Although individually these competitive advantages may not each be regarded as a moat, together they can be, because together they make ARB Corporation’s market-leading position very hard to seriously penetrate for their competition.
Prerak
:
John C and Michael,
I appreciate your view and I have no doubts about the business of ARP, what they have achieved so far is extraordinary. But the point I want to make here is, how much one should pay for the companies past laurels alone? The price one is willing to pay is based on individual’s risk capacity. Higher the price more risky it is. I give you example of another company called B. just to put ARP and company B in the perspective here are the past data.
Last eight years performance of Company B
Revenue growth: 30% compound rate per annum
Profit after Tax growth: 37% compound rate per annum
Earning per Share growth: 40% compound rate per annum
ROE has been 40 to 50% for last five years.
Last eight years performance of Company ARP
Revenue growth: 15% compound rate per annum
Profit after Tax growth: 17.5% compound rate per annum
Earning per Share growth: 16% compound rate per annum
If you had invested in company B in 2003 your return today would have been 24% per annum and including fully franked dividend 28%. So how much you are willing to pay for the company, which can give you, return of 28% compound rate per annum on you invested amount for last 8 years. (I have calculated the return at current price, which is trading at 50% discount to last years price.)
Company B (over the last 8 years)
Without dividend: 477.33%
With dividend:674%
ARP (over the past 10 years)
Without dividend: 353.93%
With dividend:446.1%
At the current price company B business is priced at 4 times the equity and ARP is priced at 5 times the equity.
2011 ROE of ARP was 29%. And based on the current price you are expecting return on your invested capital (by paying 5 times the ARP equity, paying $650 m for the equity of $130 m) you are getting 6% return. Is it worth the risk? May be yes if you are anticipating future movements aligned with past performance. I believe, the only way to protect oneself from future troubles (real or macro industry sentiment or caused by market sentiment) is to demand discount (my person favourite is 30% from the value I can estimate) from the underling value of the business and at this price of ARP there is no safety.
Look what happened to company B; just until 12 months ago every one was painting rosy pictures of company’s future just like every one is doing for ARP now. And was priced at more than 8 times the equity. Then the micro sentiment got changed, competitors started folding up (that is helping company B though), and its currently priced at 50% from last year market price and 60% down from all time high. Although company’s revenue growth is inline with last years just like ARP and NPAT growth is also inline with last years again just like ARP.
How one can protect oneself from such movements? if there is a guarantee that it won’t happen then its worth at any price but to protect against the unknown discount is the only way.
I must say there are basic differences in these companies’s balance sheet and market expectation, and ARP is my favourite from that view (and many other views). The main difference is debt; company B is having high debt and ARP having no debt.
So to conclude my view is, to protect oneself facing the same fate as shareholder of company B (I am not a holder by the way, because of the same reasons I am explaining and I think Company B is still expensive may be 20% from this level I can jump into it) are facing, discount to current value is only way. I may miss it but I wouldn’t regret it that’s for sure.
Cheers
Prerak
Hiten
:
Hey Prerak,
Out of curiosity is company B by any chance JBH?
John C
:
Hi Prerak, I take your point about risk management and I accept that demanding a big discount to IV is a valid risk management technique. I believe that only buying the highest quality companies is also a very important part of managing risk in the sharemarket. If you set the quality bar very high, and demand a very big discount, the pickings might be very slim indeed. If I had to choose (and I have), I would rather adjust my demanded discount than settle for lower quality companies.
Company B sounds a lot like JBH, if you look at the Skaffold figures up to 2011. However, the revenue growth and NPAT growth for JBH for this year (and probably the next) is expected to be negative (hence their recent profit warnings). ARP, on the other hand, is expected to maintain 27% ROE while continuing to grow revenue and NPAT. I hold both JBH and ARP by the way, but I regard ARP as a far superior company.
Regardless of whether or not Company B is in fact JB Hi-Fi or not, Company B have substantial debt, and ARP do not. As well as being debt free, ARP are also in a good industry segment with a positive outlook, with one out of every three new cars sold in Australia in May being 4WDs (from Roger’s post, above). ARP also have some competitive advantages in their chosen industry segment (of 4WD accessories), some of which are:
(1) Cost advantages from their manufacturing centres being split between Australia and Thailand, plus being the market leaders in most of the areas that they compete in, which brings economies of scale (including the ability to source and buy stock at better prices – when they don’t manufacture it themselves), and a very strong market presense.
(2) Very strong R&D spend – excellent track record of new product development – always evolving, never standing still.
(3) Marketing – they have their own magazine, published quarterly, and are always striving to keep customers aware of their ever-changing and expanding product range.
(4) Their stores – they are not just manufacturers and wholesalers, they also own their own ARB-branded stores, which customers are viewing as a one-stop-shop for all their 4WD accessory needs. ARP obviously control what is available for sale in these stores.
(5) Their staff – they are 4WD enthusiasts, not just salespeople. This attracts people to the stores because they’d rather talk to like-minded people who know what they are talking about and recommending.
I won’t go on. There’s plenty of information about ARP in their annual reports, investor presentations, and Roger’s own posts on ARB Corporation. I’m not suggesting that anybody else should buy ARP or any other company’s shares. Always seek and take professional financial advice, and make your own decisions based on your own goals, objectives, and risk appetite. I’m just saying that I personally am more than happy to see ARP sitting very near the top of my own portfolio every time I cast my eye over it, and I’m more than happy to have paid $7.78 for them in Feb 2011. Not the right strategy for everybody to be sure, but it works for me.
Cheers!
John C.
Macca McLennan
:
I love puzzles so can i guess Company B’s name
If its BHP then it’s unfair to compare ARP with it
Your general point is well taken
Macca
Brian Nolan
:
If iron ore prices fall, then won’t their input costs also fall?
Just a thought.
Cheers,
Brian.
Ian
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I think that it was Russell Muldoon that I heard one night on YMYC say: We want to buy a reasonable company at a great price and a great company at a reasonable price.
I am not sure if those were his exact words but I think that it is good advice especially when considering what price to pay for great companies.
The trick is to make sure that they really are great companies now and are very likely going to continue to be great in the future.
David Martin
:
Hi roger, i was reading your article and in it you compare your fund to the all ordinaries. If my memory serves me correctly,your fund is still heavilly weighted to cash and of course the all ords is not – hardly a fair comparison.
Fixed interest funds have out perfromed yours but of course this as useaful a yard stick as yours.
I still love your work but thought i should make this point.
David
Roger Montgomery
:
Our clients are absolutely delighted to have a fund manager who can protect their capital by moving into cash. We move in and out of cash systematically based on our ability to find value and quality. Personally I think thats the only way.
Recently an investor hosted a dinner party at which his many friends were complaining about their returns. Sitting relaxed at the end of the table not saying anything was a gentleman of mature years and the host of the party. Noticing his silence while all were drowning their sorrows, the dinner guests asked why he was looking so smug. He replied in a quite yet confident voice; “I have a guy who calls me and tells me when to go from equity to cash and when to switch back from cash into equities”. He added; “I haven’t lost anything, in fact we made money in the last year.” He asked them if they’d like the guys phone number? Rifling through jackets and handbags for pens, to obtain the number, they then began writing has he slowly spelled it out; “zero… two.. nine.. six.. nine.. two.. five.. seven.. double zero.”
Thanks David.
yavuz
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Any ideas why BKL share price has been on slow but steady decline recently?
Regards,
Yavuz
John C
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Hi Yavuz. I would suggest that while BKL is clearly an A1 that has increased their IV consistently over the last 10 years (an enviable performance to be sure), they are also currently holding a substantial amount of debt, and the performance of their CEO (& MD), Christine Holgate, has come under some scrutiny recently. For example, back in October, comments she made about a deal with pharmacies that would see their computer systems prompt them to recommend complimentary Blackmores products when selling prescription medicines were widely criticised and she took the brunt of the blame for the scrapping of that deal.
http://www.abc.net.au/news/2011-10-06/controversial-blackmores-pharmacy-deal-withdrawn/3317960
Here’s a quick snippet from that ABC news website article:
Blackmores CEO Christine Holgate was widely criticised for suggesting the deal meant pharmacists could offer “Coke and fries” upgrades when selling prescription drugs, but she said her comments were taken out of context. “It is not about up-selling. This is about selling appropriate products to consumers,” she said.
But the damage had been done and the deal was scrapped, at what cost?
Also, these are the headline figures from their most recent report, their third quarter results announcement:
HIGHLIGHTS FOR THE NINE MONTHS TO 31 MARCH 2012
• Group sales of $186M up 8.4% for the year to date compared to previous corresponding period
• Asia sales up 19% year to date (26% in constant currency) compared to previous corresponding period
• NPAT of $20.0M marginally below last year
It sounds like their expansion into Asia is going OK but that they are possibly experiencing margin compression across the business (not growing their NPAT). However, there are other possible explanations for their position. The following is from further down the (3rd quarter) report mentioned above:
Ms Holgate noted the $1.2 million in legal fees the company has incurred this year as a result of an ongoing legal dispute with the building contractor over variations and defects to the construction of the Blackmores Campus at Warriewood.
“We are confident in the merit of our legal position though, at this point in time, the legal fees are impacting our healthy profit result.”
Blackmores has progressed plans to launch in China, beginning in the fourth quarter.
“The first shipment of Blackmores product has now left our Warriewood facility,” said Ms Holgate. “We will launch in a combination of sales channels and are very excited about this new chapter in the Blackmores story.”
OUTLOOK
“Directors are encouraged by upcoming growth opportunities including new product launches and our continued success in Asia however we are mindful of the changing retail dynamics in Australia. We are on track to deliver a level of profit in line with that achieved last year.”
What does it all mean? Don’t know. However, by their own admission, they are NOT on track to grow their NPAT this year, only to maintain it. And some may see their expansion into China as not entirely without risk. I know that Coca-Cola had trouble selling iced tea in Indonesia, and also Coke can’t outsell the local Irn-Bru in Scotland no matter what they try (a source of ongoing irritation to The Coca-Cola Company I’m sure). Maybe selling vitamins and health supplements in China will also have its own headwinds.
yavuz
:
Hi John, interesting comments. This may prove to be an opportunity to buy some BKL shares, but not yet as I need to be patient. I also noticed some of their key products (fish oil and glucosamine) have been constantly on discount in pharmacies and health food shops. I am thinking maybe competition is catching up.
John C
:
Hi Yuvuz, Sorry in advance for the length of this reply… Blackmores have intentionally positioned themselves at the quality end of the market here in Australia, and therefore their products are generally the most expensive, due to the quality premium in the price. This does allow them more flexibiliy with discounting, and indeed many of their products are so regularly discounted (by 50% or more), that I only buy them when they’re half price or less. Examples are their Sustained Release One-A-Day Multi’s (180 tabs), which are around $60 full price, but I usually buy for about $24 to $28 through ePharmacy or PharmacyDirect. BKL have some excellent products, and very high profit margins on those products if they sell them at RRP, but more often than not they don’t. With WES and WOW owning those two online pharmacy stores I just mentioned, plus pharmacy wholesalers and large retail pharmacy chains demanding substantial discounts to give them a competitive advantage over their competition, BKL are having to sell for less to try to maintain market share in Australia.
Products targeting Arthritis and inflamation-type-pain relief, such as fish oil and glucosamine, are flooding the market, and there is very little difference (if any) between the effectiveness of various brands in most cases, so Blackmores, while having a very high rate of brand-recognition, and even brand-loyalty, do struggle to sell such products without matching the prices being offered by others (or least getting their prices down into the ball-park).
Because their products generally taste the same, and mostly do the same job, they have to leverage their brand (trust and loyalty), and that is not getting them as far as it used to, with the savings-conscious consumer looking for value now more than ever.
I worked for Faulding Pharmaceuticals for 6 years (I moved on 8 years ago), when they made Cenovis vitamins and minerals (and other health supplement preperations) at their South Salisbury site in Adelaide (now Mayne Pharma); their Cenovis business has since been re-located to their Golden Glow manufacturing facility in Virgina, Queensland. What I know about that industry (known within the industry as “nutriceuticals”) is that all the base ingredients are sourced from the lowest bidders, wherever they are in the world, and it’ll all about getting it crushed, mixed, encapsulated, or tabletised, then bottled, as quickly and efficiently as possible. They all use very similar (and often identical equipment) do perform these tasks, and in the end it comes down to how they control their costs, and how much profit they can squeeze out of consumers for the finished product, like most businesses.
Blackmores used to try to claim that they used a better class of ingredients. This has changed somewhat. A few years back, they used Echinacea angustifolia in some of their Echinacea products, which is generally thought to boost the immune system so that you lessen the chance of getting a cold or flu, or lessen the severity of one you may already have. The following paragraph is from Wikapedia:
Marketed and studied medicinal products contain different species (E. purpurea, E. angustifolia, E. pallida), different organs (roots and herbs) and different preparations (extracts and expressed juice). Their chemical compositions are very different. Multiple scientific reviews and meta-analyses have evaluated the published peer reviewed literature on the immunological effects of Echinacea. Reviews of the medicinal effects of Echinacea are often complicated by the inclusion of these different products. Evaluation of the literature within the field suffers generally from a lack of well-controlled trials, with many studies of low quality.
In summary, many think echinacea doesn’t do much at all, others think it does work, but most agree that whether it works or not (and how effective it is) depends a lot on which type is used, where in the plant it comes from, and how it is extracted. Augustifolia is generally accepted to be one of the better varieties of echinacea with the active ingredient in it being stronger and more effective. Purpurea, however, is cheaper to source. So, while being of lower quality (lower strength and effectiveness), echinacea purpurea is usually the only type of echinacea found in most preperations today in Australia, including in all of the Blackmores products that contain echinacea.
I give this example to show just one example of where quality-conscious consumers may find it hard to feel confident that Blackmores products contain better quality ingredients or higher (more therapeutic) doses of those products. A couple of years back, Blackmores released a 2,700 gram St John’s Wort (Hypericum perforatum) tablet, because that was the daily dose (of that herb) revealed in a recent study to be the most effective for treatment of symptoms resembling mild depression, irritability, and possibly even sleeping issues. Golden Glow (and others) immediately came out with either identical strength formulations or slightly stronger formulations, which were all cheaper to buy than the Blackmores product.
It seems to me that Blackmores main competitive advantage is their name/brand-recognition, which many consumers believe (rightly or wrongly) represents quality in a crowded marketplace, and also their brand loyalty. However, to maintain or increase market share, BKL are having to discount their prices (this pressure is coming from wholesalers and retail pharmacy chains too), which results in margin compression.
If they are truly a very-low-cost producer, they may be able to absorb these price reductions better than their competition, but my research suggests that they may indeed have higher costs, not lower costs. They predominantly bottle in glass, not plastic, which is more expensive, causes more downtime during production (broken glass in the wrong bottle is a very bad thing for them), and has to be handled more carefully. They are an employer of choice – they pay and treat their workers well, which I applaud, and I’m sure this results in a much lower staff turnover, but not sure if it makes them more or less competitive from the point of view of overheads. Then they have stuff ups like last September and October, when they had bottled and labelled thousands of bottles of products ready to go into pharmacies for the big “coke and fries” up-sell push (“taken out of context”, said their CEO Christine Holgate – more detail about this above in my previous post/comment), then they couldn’t sell a single one, because the whole thing was scrapped at the last minute, after the media got hold of it. They may well have re-labelled the stock, or re-worked it, and then sold it anyway, but there are still significant costs involved in such debacles.
And then there’s their push into China. It may go spectacularly well. However, I’d prefer to wait and see. Some of their preperations are based on, or at least contain some, traditional chinese medicine (ginseng, Dong Quai – or Dang Gui, astragalus, ginger, salvia, cinnamon & licorice – to name a few) but probably not prepared and delivered in the traditonal Chinese way. I can’t help but worry that they may encounter some resistance there. I know that many Chinese, especially the younger generations, are keen to embrace symbols of western culture and buy what westerners buy, but I feel that vitamins, minerals and herbal supplements may not fulfil that need. There may be a view, among some in China, that Blackmores are trying to sell ice to eskimos.
I like the company, and I’ve held them before, but I don’t hold now. I think the market is trying to tell us something when I look at their SP graph. It could be a sustained sell-down by an insto (who can’t dump all of the stock at once, when they want to exit, due to the liquidity of the stock), and that might also explain ORL’s SP’s recent south-bound drift, but in both cases (BKL, and ORL), there may also be some information out there that all is not well, and it just hasn’t drifted down to the likes of us yet….
Michael S
:
Hi,
I am a pharmacist and the pharmacy I work in didn’t range-in the new Blackmore’s range last year. The products themselves have some merit and could provide benefit to patients but the comments the CEO made or was “alleged to have” made were just daft for lack of a better word. It completely removed the focus on the potential benefits that their researched new formulations can have.
Regards,
Michael S
Roger Montgomery
:
Dylan writes:
Submitted on 2012/06/25 at 12:08pm
I know this is an old post but 3 years on, I would like to know what people think of Blackmores now and whether opinions have changed? Is its competitive advantage and moat been eaten away from the likes of new competition ie: Swiss or is it likely to stand the test of time and prospects remain bright?
Michael Leslie
:
John C, I agree with what you say about ARP and COH.
Hiten and Prerak, might I humbly suggest you have a closer look at ARP. I have held this company for some years and have been greatly rewarded although I know that I purchased above IV. This first class A1 company does not trade below IV very often. On 30 June Skaffold will show that it is line ball with IV so it might be a good time to consider a purchase. I suspect that the market has punished it because, not only is there only likely to be a 4% increase in sales and static profit, but there might have been an expectation of a special dividend this year which is now unlikely.
Just a personal view!
Roger Montgomery
:
Thanks Michael. Seek and take personal professional advice everyone.
Hiten
:
I wish I could say I am also a shareholder of this wonderful company!
Unforturnately, couple of years ago I had the opportunity to buy in just over $5.50 and decided to wait for slightly more discount which never happened and I just kept watching the price go up and up.
Today would be happy to buy it under $7.50 even though I don’t think it will be a bargain price but I still believe as Buffett would have said it’s worth paying a fair price to buy a wonderful business then to pay a wonderful price to buy a fair business
Simon
:
Hi Roger,
Interesting company. Big share transaction of 700000 shares on 6th June, some one must like it.
Simon
Prerak
:
Good article on a great company Roger,
it’s been on my watch list for a long time now. I like the business and its performance, but don’t like the price. No matter how good the business is, its not worth at infinite price. Personally I think, there is no safety of margin at this level, may be will be good at 50% discount from this level . I know am hoping here.
Cheers,
Prerak
John C
:
As with Cochlear (COH), the opportunities to buy shares in companies of this quality at significant discounts to current (or next year’s) IV are few, if they occur at all. There was some discussion here when COH dropped and Roger (and many others) took advantage of the temporary price drop to buy more stock, despite admitting that the price paid was still above the current IV of COH at that time. If the company is an A1 amongst A1s – as ARP and COH both are – of the highest quality – with every indication of increasing IV for the foreseeable future – sometimes you have to buy at a discount to future estimates of IV, and that might be 4 or 5 years out.
For instance, I bought 4,000 ARP (ARB Corp) for $7.78 on 17-Feb-11. That was based on my estimate of IV in 2016 (5 years out at the time). They closed Friday at $8.81, so although only 13% up in 16 months, I have every confidence that they will continue to climb over time, as their IV does also. Companies of ARP’s quality may always trade at a premium to current value, as COH does, simply because of demand. When this is the case, it may pay to take a longer term view, or you may never end up with shares in such a wonderful company.
Roger Montgomery
:
Thanks for that John and well done.
Ps. I do recall heavy criticism here for buying COH though so not sure about how “many others” followed.
John C
:
OK – maybe not “many” – how about “a few” others…? Unfortunately, I wasn’t one of them, but what you said at the time was true – opportunities like that may not happen very often, and I wish I had bought some COH at that time. Their product recall did provide a rare chance to purchase shares in a very high quality company at a reasonable discount to their usual trading range, and as their IV should rise for the foreseeable future, their IV will in time exceed the price paid for the shares.
I didn’t (and don’t) expect any hic-ups from ARB Corp (ARP), so I was happy to pay the going price at the time and wait for the IV to catch up and overtake the price I paid (early last year). It may not be standard value-investing practise, but extraordinary quality demands a slightly different stategy IMO. Better to pay a fair price for an outstanding company, than miss out entirely on being a part-owner of that company.
ARB Corp is one of my very favourite stocks.
MND is the other one. And I only paid $14.49 for MND a couple of years back. Back then, that was a discount to IV IMO – standard stuff – buying quality at a discount. It’s just a pity that not all of the top quality companies afford us such opportunities.
Roger Montgomery
:
Agree John,
Roger B. has been running the company for 36 years so one should reasonably expect some changing of the guard and that may trigger jitters as I am sure it will over at Berkshire.
Mike Sloan
:
Roger,
He is no spring chicken, however in terms of age, he and his brother are youngesters compared to Buffet and Munger. Do you know how significant a contribution Andrew B and John Forsyth make to the running of the business? To the best of your knowledge, has there been any comment from the company with regard to succession planning?
Roger Montgomery
:
Only that the Board are responsible for Board and Management succession planning. This is a neat summary of the present situation from G Middleton an adviser to dentists: “ARB’s senior management are low-profile individuals who demonstrate an understanding of their
business. ARB has endured through high fuel prices, which threatened to limit its market, high steel
prices, which threatened to make its products too expensive, the global financial crisis and shortages of
skilled tradesmen, which forced it to take part of its manufacturing operation offshore to Thailand, whilst
maintaining the high technology manufacturing components at Kilsyth in Victoria. ARB has coped with
each challenge in succession. It produces the most easily understood annual report of any stock market
listed Australian company that I follow. There are no photos of the CEO or the directors, but it provides a
salutary lesson in tight management of its brand. It distributes products through company-owned fit-out
sites and tightly controlled franchises. You don’t see ARB branded products being sold alongside cheap
trash in chain stores.”
Mike Sloan
:
Roger,
Middleton also says “The rate at which ARB Corporation continues to adapt to its environment suggests that it will be a substantially different business in twenty years’ time”.
Obviously the nature and success of that business will be dependent on who is leading it. Given the plaudits regularly bestowed on ARB from the investment community, I would expect professional analysts and fund managers to be queuing at G Brown’s door in an attempt to gain an understanding of the internal functioning of the business and the personalities that are driving it. However it appears Mr Brown is a somewhat less gregarious individual than a certain Mr Buffet! Have you ever requested/gained an interview with G Brown or any other ARB representative?
Roger Montgomery
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Hi Mike,
R Brown?
Mike Sloan
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oops, maybe getting too familiar using his middle initial! yes of course I meant R Brown.
Roger Montgomery
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Indeed!
Mike
:
Are you going to respond to the question?
Roger Montgomery
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What was the question Mike? Interview? No. We adopted Ben Graham’s approach to ARB with regards to management. Never had a reason to question their disclosure nor needed to meet for further explanation.