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Dorman Products: Twelfth Consecutive Quarter of Double-Digit Sales Growth

November 20, 2012 | About:
Dorman Products (DORM) is a leading supplier of dealer exclusive automotive replacement parts, automotive hardware, brake products and household hardware to the automotive aftermarket and mass merchandise markets. DORM was founded in 1978 and listed on Nasdaq since 1991.

Valuation

DORM is currently trading at 16.9x trailing 12 months P/E, this represents a new ten year historical valuation high for DORM. DORM is also valued at 9.4x trailing 12 months EV/EBITDA and 0.34x PEG. DORM has achieved a trailing 12 months ROE of 20.2% and a five-year average ROE of 15.2%. In terms of book value growth, DORM grew its book value per share by a five-year CAGR and ten year CAGR of 15.1% and 14.7% respectively.

Financial And Business Risks

DORM is debt free with net cash of $66.1 million representing 6% of its market capitalization of $1.1 billion.

DORM currently services more than 2,800 active accounts. Four customers (AutoZone, Advance Auto, O’Reilly and Genuine Parts Co.) each accounted for more than 10% and in the aggregate accounted for 55% of net sales in 2010 and 2011. Its five largest customers accounted for 83% and 78% of accounts receivable in 2011 and 2010, respectively.

Many of DORM's customers have grown larger as a result of the consolidation of the automotive aftermarket. They now have more bargaining power in the negotiations for the sale of products and may require DORM to provide extended payment terms and returns of slow moving product in order to obtain new or retain existing business.

Competition within the automotive aftermarket parts business is intense. DORM competes in North America with both original equipment parts manufacturers and companies that supply parts only to the automotive aftermarket like DORM.

Business Quality and Capital Allocation

DORM is a dominant aftermarket supplier of formerly "dealer only" parts. Approximately 26% of its parts are comprised of parts and fasteners that were original equipment dealer “exclusive” items at the time of their introduction. Original equipment dealer “exclusive” parts refer to parts which were traditionally available to consumers only from original equipment manufacturers or salvage yards. These dealer “exclusive” parts represent 63% of DORM's net sales in 2011.

New product sales opportunities have driven DORM's revenue for the last three years, with 20% of DORM's sales generated from products introduced in the last two years. The growth in aftermarket products has created 60 new-to-the-aftermarket categories, 1,058 new-to-the-aftermarket items and over 4,200 new parts in line extensions in the past three years. DORM introduced nearly 2,500 new parts in 2012, of which over 630 of these were formerly dealer-only parts.

DORM has a globally diversified manufacturing base, with no one manufacturer supplying more than 10% of its products and 80% of products purchased directly from vendors in a variety of foreign countries outside the U.S. DORM is not dependent upon the services of any one contract manufacturer, because numerous contract manufacturers are available to manufacture its products.

DORM has no history of paying dividends.

Conclusion

Current lofty valuations reflect DORM's transition from value to growth. In the past six months, insiders have sold 597,609 shares in DORM for more than $15 million.

Disclosure

The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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