Accelerating EV Adoption Will Shrink The 4WD Accessory Market

Key Takeaways

• Shifts toward electric vehicles, urbanization, and regulatory changes threaten ARB's core market, risking stagnation and greater compliance burdens.
  
• Rising operating costs and global competition could erode margins, weaken earnings, and diminish pricing power over time.
  
• Strategic US expansion, innovative product development, and diversified channels underpin ARB's long-term growth, earnings resilience, and brand strength amid challenging vehicle markets.

Catalysts

Engages in the design, manufacture, distribution, and sale of motor vehicle accessories and light metal engineering works.

• Growth in demand for ARB's products is structurally threatened by accelerating global adoption of electric vehicles, which require fewer traditional 4WD aftermarket accessories; this fundamental shift in vehicle technology risks narrowing ARB's addressable market and could result in long-term stagnation or decline in revenue.
  
• Ongoing urbanisation and changing lifestyle preferences among younger generations are likely to further decrease interest in off-roading and adventure driving, restricting the pool of core customers and potentially driving down market penetration and long-term sales growth.
  
• Regulatory tightening on vehicle emissions and modifications is set to increase compliance costs and may limit the scope or legality of many of ARB's aftermarket accessories, resulting in margin pressure and a higher risk of product obsolescence that could erode profitability.
  
• ARB's significant expansion in operating costs, especially from rising employee expenses and investments in new sales channels and international operations, represents a structural step-change in the cost base; if expected growth fails to materialise, this could drive sustained net margin compression and weaker earnings.
  
• Increasing global competition from low-cost overseas manufacturers threatens to undercut ARB's pricing power and market share, particularly as the company's investments in international distribution expose it to more aggressive price-based rivalry, causing further risk to both revenues and gross margins over the long term.

ARB Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on ARB compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming ARB's revenue will grow by 8.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 14.2% today to 15.2% in 3 years time.
• The bearish analysts expect earnings to reach A$140.3 million (and earnings per share of A$1.68) by about July 2028, up from A$102.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, down from 28.1x today. This future PE is lower than the current PE for the AU Auto Components industry at 20.9x.
• Analysts expect the number of shares outstanding to grow by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.17%, as per the Simply Wall St company report.

ARB Future Earnings Per Share Growth

Risks

• Continued double-digit export sales growth-15.4% overall and 18.7% in the US-shows strong international momentum despite challenging global vehicle markets, supporting long-term revenue resilience and potential for earnings growth.
  
• US market expansion through the acquisition of Off Road Warehouse and 4 Wheel Parts, with January 2025 returning to profitability and ongoing integration efforts, introduces significant upside for long-term earnings and market share as the US store network expands to 53 sites.
  
• Robust product development, including innovative launches like the brushless ARB compressor and new tie-ins with leading OEMs such as Toyota USA and Ford, sustains ARB's long-term brand relevance and supports margin preservation through premium offerings.
  
• Investments in diversified sales channels (e-commerce, flagship stores, new acquisitions) and global engineering capacity are designed to capture long-term shifts in retail and distribution, underpinning growth in both domestic and overseas aftermarkets with a positive long-term impact on sales and net income.
  
• A strong balance sheet with no debt, continued dividend payments, and ongoing strategic acquisitions (MITS Alloy, Poison Spyder, NZ distribution) position ARB to weather short-term cyclical weakness while capitalizing on global 4WD and outdoor recreation secular growth, directly benefitting revenue, net margins, and overall financial stability.

Valuation

• The assumed bearish price target for ARB is A$27.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of ARB's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$49.12, and the most bearish reporting a price target of just A$27.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$924.4 million, earnings will come to A$140.3 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of A$34.54, the bearish analyst price target of A$27.0 is 27.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.