In this section we provide readers with three stocks that have attracted the interest of the broking community or the ‘herd’. Broker recommendations tend to be biased and highly optimistic. We try and breakdown these barriers and give our own honest opinion. It is important to keep in mind that technical analysis is only one part of the investment process and any recommendations do not give consideration to the underlying fundamentals of each business.
ARB Corp (ARB) – $22.00 – Designs, manufactures, distributes and sells four-wheel drive vehicle accessories and light metal engineering works with manufacturing plants in Victoria, Australia and Rayong, Thailand. It has a warehouse and sales centre located in Australia, Thailand and USA, as well as distributers in over 100 countries worldwide. This week ARB issued a market update which provided an overview of its operations, financial highlights, its growth strategy and outlook.
Broker View: Macquarie (OUTPERFORM $24.50) – The broker is bullish on ARB following the recent market update. Domestic conditions are supportive and ARB’s exports are growing. Macquarie says the company is a high quality business with a great track record.
Unconventional View: We agree with Macquarie. We like the ARB story. Its business model and its expertise in product innovation, has allowed it to become the leader of 4WD products in its industry. It’s ability to market and export parts through its global distribution network have made it one of the best performing long term stocks in the market. Shares have risen from $2 ten years ago to $22 today. The reason ARB has been so successful is because it operates in a specialised global market for 4WD products. The only downside is softening demand for 4WD’s, which we can’t see happening for quite some time.
Going by its recent market update, business is great. The company recorded sales revenue of $208.1m up 12.4% and a profit of $23.4m. The company has invested heavily in property, plant and equipment this year and has no debt. It also paid an interim dividend of 17.5c. Profit grew at an average rate of 12% over the last 10 years. This has been supported by steady demand in new 4WD vehicles sold in 2017. The company isn’t just performing well in Australia, sales in North America and Europe are doing very well. Exports remain the main driver of sales growth with the company targeting exports of 50% of sales. The Australian market is maturing and is heavily saturated by ARB’s products. So we expect growth in Australia to be steady and stable, in the low to single digits increases. It’s the export sales that is making the difference. In the presentation, ARB recorded sales of 16.3% to USA, Europe, Thailand and even the Middle East.
The message here: The 4WD market is booming in many parts of the world and we think there is strong upside potential even from here. There is some concern about electric vehicles, but these concerns haven’t had any impact on the company’s bottom line. With exports remaining the key focus for the company, we think ARB can continue to expand globally throughout the Middle East and Europe via innovation, new product development and expansion of its distribution networks. There are many opportunities for ARB. The company provided an outlook statement as well. It expects to open 7 new stores before the end of the year and increase capacity in Thailand. Overall, we think ARB has solid fundamentals. Its balance sheet is rock solid with a net cash position. Sure the stock is expensive on a PE of 32x, but we think its justified with a high and rising ROE of around 18%. On the chart, ARB is looking very rich. It’s always been a question of price. Despite solid fundamentals, this recent share price rise has caused ARB to break out on the upside of its uptrend channel. We like the stock and its story, but we suggest investors buy on a pullback at around the $20-$21 mark. RSI is looking overbought at 60. Long term trend is up.
Bapcor – $6.32 – Is another automotive company. Formerly Burson Group, Bapcor is an Australian company that distributes automotive aftermarket parts such as replacement parts and consumables used in the service and repair of vehicles. It also includes the sale of accessories and maintenance products to vehicle owners. BAP operates over 145 Auto Parts stores across Australia. BAP has access to over 500,000 vehicle parts and accessories from in excess of 1,000 suppliers. BAP also provides customers with car care services which include cash wash, tire services and other services. The Retail & Service store network stands over 500 stores, comprised of 331 franchise stores and 54 company owned stores. These include Autobarn, Autopro, Carparts, opposite lock and Sprint Auto Parts. Bapcor acquired Hellaby Automotive business last year. BAP also presented at the Macquarie conference where it reaffirmed its FY NPAT guidance.
Broker View: Morgan Stanley (OVERWEIGHT $7.00) – The broker is bullish on Bapcor. It believes the recent lack in share price activity, presents a great buying opportunity. It remains confident in the company’s medium-term growth outlook and says management has an enviable track record.
Unconventional View: We agree with Morgan Stanley. There are actually 6 Buy recommendations on BAP. So everyone seems to be on the same page with this stock. There is huge demand for auto parts and this is likely to stay this way for quite some time even throughout economic cycles. Sure there is concern about electric vehicles coming through, but these concerns haven’t had any impact on the company’s bottom line and are still some time off from materialising in this country. BAP has a strong position in the retail space for automotive parts and has a huge network. Online retailers such as Amazon have been unable to penetrate this market as tradespeople and mechanics still purchase products from retail outlets. They typically require immediate delivery of products and are comfortable in using retail outlets such as Autobarn for product purchase.
BAP presented at the Macquarie conference this week. Looking at the chart below, you can see that BAP remains a trade focused business with 50% of its total revenue coming from trade and not from retail. It’s main business here is Burson auto parts.
What makes us even more confident is that the company is on target to hit its FY NPAT target and that it continues to perform strongly with same stores sales hitting 4% ytd. BAP has even included a slide addressing the Amazon concerns. It believes Amazon will stay focused on electronics, health & beauty, kitchen and toys. We agree. At some stage if and when Amazon does enter the auto market, it shouldn’t affect BAP’s trade business because it is protected due to the high service levels it offers. BAP also touched on electric cars. As we mentioned above, the entry of electric cars could be a positive rather than negative. BAP says it will adapt and could very well supply parts and components to the electric car industry.
All in all, we think BAP’s fundamentals are solid. It’s trading on a PE of 25x which isn’t overly expensive yet its ROE is rising and in the double digits. Gross yield is also ok. The stability and rising demand for auto parts is the reason why we like BAP. It’s in the right industry both domestically and globally. Until electric vehicles take over which is still a decade away, the total number of vehicles will continue to grow at a steady pace and will underpin BAP’s steady growth. On the chart, BAP has broken out on the upside out of a pennant flag. This is a bullish buy indicator. It’s also trading above its 50 day EMA. However like ARB Corp, RSI is high. In this case it’s around 80, which means it is a little pricey. Morgans says “the RSI indicator has reached overbought territory suggesting that the near term upside from here is likely to be limited.” This is short term though. We suggest investors wait for a pullback, then buy. Long term trend is up.
JB Hi-Fi (JBH) – $28.80 – Presented at the Macquarie conference as well. Shares fell almost 10% after JBH announced a profit downgrade. Weaker earnings after a sales slowdown forced the company to cut its full-year profit forecast. NPAT now expected to hit $230m down from $235m-$240m. FY sales guidance remained $6.85bn. The company blamed weather for lower sales in that the unusually warm start to winter, reduced sales from The Good Guys who sell home appliances.
Broker View: Macquarie (OUTPERFORM $28.80) – The broker remains positive on JBH despite the profit downgrade. It anticipates margin pressure to continue at The Good Guys but sales at JBH remain strong. It has kept its Outperform rating.
Unconventional View: We disagree with Macquarie. We last wrote about JBH early January when the stock was trading at around $28.21. It’s now $23.58. We were bullish on JBH and on The Good Guys and saw the stock going a lot higher “especially if JBH beat expectations going forward”. We got this one wrong.
Even though last Christmas JBH was teeming with customers and recorded solid sales growth, we think the market’s expectations were far too high and The Good Guys hasn’t lived up to its expectations. Whilst the company has laid blame on the weather, we think there are deeper problems at play at The Good Guys. An article in the AFR talked about The Good Guys slashing prices and discounting products just to hold its own. JBH has spent and reinvested a lot into making this business work, so it’s disappointing that The Good Guys transaction may not have been the great deal it was made out to be.
Irrespective, the market was disappointed and shares were sold off as a result. JBH also has a fair percentage of its shares sold short, roughly 16.47%. Once the shorters get hold of a stock, it can really create havok with its share price. What seemed like the perfect integration, now looks complex and in some ways unattractive. For that reason, we think JBH has a bit of work cut out in-order to lift sales at The Good Guys and return back to its former self. That’s a negative for its share price and will be a headwind going forward. The risks are pointing to the downside. Usually after one profit downgrade, there’s more to follow.
We got this one wrong. On the chart, JBH hasn’t yet broken its long term uptrend support line which intersects at around $22.90. A break here and it’s a definite sell.