ARB's ARB sales are up 7% in September-quarter fiscal 2025, compared with the previous corresponding period. However, profit after tax is modestly down on the prior corresponding period ("PCP"), with labor costs a key headwind.

ARB Corporation designs, manufactures, and distributes four-wheel-drive and light commercial vehicle accessories. The firm has carved a niche with aftermarket accessories including bull bars, suspension systems, differentials, and lighting. ARB operates manufacturing plants in Australia and Thailand; sales and distribution centres across several countries. The Australian division, which generates the vast majority of group earnings, distributes through the ARB store network, ARB stockists, new vehicle dealers, and fleet operators.

Why it matters: ARB's absolute sales levels have yet to return to its fiscal 2022 peak $695 million. The first quarter of fiscal 2025 indicates revenue growth is strengthening, as we expect, and we make no changes to our forecasts. First-quarter trading reflects 6% growth in Australian aftermarket, 10% growth in export sales, and a 2% decline in original equipment manufacturers. On a consolidated basis, it broadly tracks our unchanged fiscal 2025 revenue growth forecast of 7%. We continue to forecast about 7% net profit growth in fiscal 2025. This represents a significant turnaround from declines in the September quarter. We think ARB has pricing power in Australia, and can offset cost inflation with price rises. Indeed, the company hiked prices in October 2024.

The bottom line: Revenue is tracking our expectations, although earnings are lagging. Nevertheless, we view shares in narrow-moat ARB are materially overvalued based on our unchanged forecasts and $27 fair value estimate. The company continues to look toward export markets for growth. The US is a particular focus, with increased distribution through ARB's 50% ownership of retailers Off Road Warehouse and 4 Wheel Parts, and a recent original equipment manufacturing contract for Toyota USA. We think the market is overestimating ARB's ability to replicate its Australian success in other countries. We have yet to see evidence of the brand equity and retail price premium enjoyed in Australia translating to foreign markets such as the US, which have much lower margins.

Business strategy and outlook

We expect ARB's strong earnings growth to persist, driven by the competitively advantaged Australian business that benefits from industry tailwinds. We forecast the firm's top-line growth will be underpinned by incremental increases in domestic market share as it rolls out stores, in addition to continued international expansion, with a focus on the US

ARB provides automotive accessories for four-wheel-drive, or 4WD, vehicles—namely, 4WD utility vehicles, and medium and large sport utility vehicles, or SUVs. The vast majority of earnings are generated in Australia, where sales of 4WD vehicles have grown strongly in recent years. While headline new vehicle sales in Australia have remained stagnant over the five years to fiscal 2019, sales for vehicles in ARB's niche target market have increased at a CAGR of around 6% over the same time period. We forecast SUVs and 4WD utility vehicles to continue to outpace passenger vehicle sales in the near term and also forecast ARB's target market growing at a CAGR of 7% over through to fiscal 2029.

We expect the firm to capture incremental market share in Australia as it rolls out new stores. We estimate the majority of sales are conducted in ARB-branded stores as products usually require professional fittings. The firm's network of store fronts defends ARB's premium positioning, ensuring end-to-end reliability from manufacturing to fitting. We expect ARB will also need to continue to invest heavily in its brands and its narrow moat by maintaining a high level of expenditure on marketing, research, and development. This expenditure is necessary to maintain the firm's brand equity and differentiate its products from lower-end competitors, allowing ARB to remain at the forefront of product innovation and quality, improving brand awareness and ensuring a healthy pipeline of new product releases.

Moat rating

ARB enjoys a narrow economic moat thanks to its intangible brand assets.

We expect returns on invested capital to average approximately 19% during the next five years, compared with 19% in the last five, comfortably exceeding the company's 9% weighted average cost of capital.

ARB's range of vehicle accessories have established significant brand strength, as demonstrated by the firm's ability to charge a substantial price premium to competitors. ARB has established itself as the market leader in the niche Australian 4WD vehicle aftermarket accessories market, and we estimate the firm enjoys significant share of nearly 50% in fabricated products and around 35% in suspension. Pricing remains in the upper end amongst competitors, usually above other high-end manufacturers such as TJM, and materially more expensive than lower-end competitors and OEM products. We believe ARB's products are perceived by consumers as higher-quality, and purchases are often highly conspicuous, with accessories such as bull bars and snorkels prominently displayed on a vehicle's exterior, supporting the company's pricing power.

There are few barriers to entry in the automotive aftermarket industry, and ARB is no stranger to competition. While there are competing imports to Australia, in addition to domestic competitors, these manufacturers and distributors have struggled to build the necessary brand strength and lack the reach of ARB's supply chain and network of shop fronts. Similarly, online competition is not a significant threat to ARB's business. Products usually require professional fitting (often in ARB stores), and the often heavy and bulky accessories can make delivery cost-prohibitive.

The majority of sales are conducted in ARB-branded stores, in addition to 4WD specialist stores, new vehicle dealers, and fleet operators. We estimate a large portion of these are automotive products. The company has established strong relationships with these dealerships, which are able to offer their customers ARB accessories as part of their purchase, fitted by ARB, and included in a single financing/leasing arrangement. This is a selling point for dealerships, and supports a steady flow of demand for ARB products. Around 8% of ARB's sales are through OEM relationships, typically carrying the OEM brand. While there are often switching costs with OEM relationships, we don’t think these relationships justify switching costs for the entire firm given the small proportion of overall sales generated by this arrangement, and the lower margins generated versus ARB’s core aftermarket business.

ARB also has an extensive track record of investment into its brands. While expenditure on research and development and marketing spend are not a source of competitive edge, maintaining resources is necessary to maintain product quality and brand equity, ensure a healthy pipeline of new product releases, and differentiate its products from lower-end competitors. ARB's combined marketing and R&D expenditure is currently around 3% of revenue, from around 3% in fiscal 2015—more than doubling expenditure as sales have increased over 110% during the same period. We expect the company will maintain this level of expenditure over the next decade.

ARB bull say

  • Online competition is not a significant threat to ARB's business. Products usually require professional fitting (often in ARB stores), and the often heavy and bulky accessories can make delivery cost prohibitive.
  • ARB's range of vehicle accessories have established significant brand strength, underpinning its narrow economic moat, allowing the firm to enjoy pricing power and high returns on invested capital.
  • ARB has opportunities for growth with store roll-outs in Australia and continued overseas expansion.

ARB bears say

  • An economic recession could drag new vehicle sales lower, affecting demand for ARB's products.
  • ARB lacks significant scale and retailer relationships to increase its influence over customers and suppliers.
  • The 4WD accessories industry has few barriers to entry, and with products such as bull bars essentially just fabricated steel, ARB's products are somewhat replicable.

Get Morningstar insights in your inbox

Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.