The All-In-One screener at GuruFocus continues to pull up interesting candidates for review; this time it is Dorman Products Inc. (DORM, Financial), a result of (again) asking the screener for companies that have 5-Star Predictability ratings and no debt.
Previously, I profiled three other companies with these two characteristics: Rollins Inc.(ROL, Financial), Jack Henry & Associates Inc.(JKHY, Financial) and NICE Systems Ltd. (NICE, Financial).
Dorman, like the other three, posts very strong metrics for financial strength, growth and profitability. It is a mid-cap company focused on growth.
The company calls itself “a supplier of replacement parts and fasteners for passenger cars, light trucks and heavy-duty trucks in the automotive aftermarket.”
Steven McBoyle of Royce Premier Fund said of it a year and a half ago, “. . . Dorman, in our classic sense and definition of a premier company, is a wonderful business moat. It has had the ability to compound over many years and we believe that will continue.”
It is also on sale, at least temporarily, as we see in this one-year price chart:
Is this a good time to buy Dorman?
History
According to afterMarketNews and Nasdaq.com, Dorman Products first entered the world in 1918; the Cincinnati-based company began with a focus on “hard-to-find” parts and automotive hardware. In 1994, the company was acquired by R&B Inc., which had been founded by Richard and Steven Berman in 1978. Little more than a decade later, in 2006, shareholders of R&B voted to change the name to Dorman Products Inc.
The company was listed on Nasdaq, under the symbol DORM, in 1991. Despite going public, the founding family still holds 24% of the outstanding shares.
Dorman’s business
According to the company's annual filing with the SEC, it supplies replacement parts and fasteners for motor vehicles, including passenger cars, light trucks and heavy-duty trucks, to what is called the automotive aftermarket (aftermarket referring to products bought after a new vehicle is sold by a dealership).
Within that arena, Dorman offers approximately 150,000 different replacement parts and fasteners. Many of those items are designed and engineered—but not manufactured—by the company.
It considers itself the dominant supplier of what it calls original equipment “dealer exclusive” items. In other words, it allows consumers to bypass car dealerships, car manufacturers and salvage yards when buying replacement parts and add-ons. That allows it to brand itself this way (image from the October 2016 Investor Presentation):
Some 84% of products are sold through Dorman’s own brand names, and the remainder through the private labels of customers, other brand names or in bulk.
Most of those products sold under Dorman brands go to auto aftermarket retailers such as Advance Auto Parts (AAN, Financial), AutoZone (AZO, Financial) and O’Reilly Auto Parts (ORLY, Financial). It also sells through regional and local warehouse distributors such as Genuine Parts Co. (GPC, Financial), also known as NAPA, and in specialty markets.
Its main market is the United States, but some replacement parts are also sold to customers in Europe, Mexico, the Middle East, Asia and Canada.
Products are marketed through seven sub-brands, each of which addresses a specific product line or market segment. In 2015, it added its “OE Fix” campaign; this highlighted engineering improvements that eliminate known OE (Original Equipment) failures and made it possible to replace only failed original components rather than the entire assembly.
New product development is one of the company’s strategic advantages. It says, “In developing our products, our strategy has been to design and package parts so as to make them better and easier to install and/or use than the original parts they replace and to sell automotive parts for the broadest possible range of uses.”
This table shows the number of new parts per year for three previous fiscal years:
While Dorman Products has more than 2,300 customers, four of them accounted for more than 10% of sales each: Advance Auto Parts, AutoZone, Genuine Parts and O’Reilly.
On the other hand, no one manufacturer supplies more than 10% of the company’s products. About 29% of its products are supplied by American companies, the balance is sourced internationally. It does very little manufacturing itself.
This slide from the October 2016 Investor Presentation sums up the Dorman worldview, and most of its brand names:
Dorman Products takes care of replacement parts and fasteners when consumers do not want to buy from car dealerships or the original manufacturers. It is a major supplier to the well-known auto parts stores and distributors.
Revenue
Annual revenue for the 12 months ending Sept. 30 was $835.3 million.
The company looks at that revenue through four classes of products:
This chart shows revenue over the past 10 years:
GuruFocus reports the following average annual revenue growth rates:
- Three years: 13.1%
- Five years: 13.5%
- 10 years: 12.2%
Revenue grows or contracts according to many variables. This slide from the Investor Presentation shows the four most important variables:
Dorman has posted solid, double-digit revenue increases throughout the past decade. Three classes of products make up the bulk of this income.
Competition
The company calls its business and industry highly competitive. That competition comes from not only other aftermarket suppliers, but from the auto manufacturers and dealers. In addition, some of its private label customers compete with Dorman brands.
Hoover’s lists its three main competitors as Federal-Mogul Corp. (owned by Icahn Enterprises (IEP, Financial)), Genuine Parts, and General Parts International Inc. (owned by Advance Auto Parts).
Many companies compete for aftermarket customers. In Dorman’s case, we see a company that competes with some of its most important customers, Advance Auto Parts and Genuine Parts.
Moat
Given this competitive profile, an investor might think Dorman has no moat and no pricing power. But McBoyle thinks otherwise, “Its unique structural advantage lies in its market intelligence as it relates to the failure rate of auto parts. Specifically, the data collection and the database that it has amassed over time is really quite unique in the industry—no one has been able to replicate it. In addition to that, Dorman benefits from the fact that it is an asset-light production model. So margins are actually industry leading, close to 20% pretax. Return on invested capital is greater than 20%.”
Vuru reckons Dorman has a wide moat:
Morningstar says it should get a Narrow Moat rating.
A Seeking Alpha contributor argues, “DORM operates in a highly competitive industry. However, it has been able to create an economic moat by being a low-cost producer and by differentiating its products.”
While there is no consensus on what kind of a moat Dorman has, investors can take comfort in knowing there is at least a narrow moat, and perhaps more.
Other
Dorman is incorporated in Pennsylvania and headquartered in Colmar, Pennsylvania.Ă‚
According to Reuters.com,Ă‚ Executive Chairman of the Board, Treasurer and Secretary Steven Berman has held the chairmanship since 2015. He is one of the founders of R&B Inc. and previously served as CEO. President, CEO and Director Mathias Barton has been CEO since 2015. Barton joined the company in 1999 and has held various executive positions. Chief Financial Officer Kevin Olsen has been CFO since 2016. Olson, a CPA, served as a CFO and chief operating officer at other companies before joining Dorman.
Ownership
None of the gurus followed by GuruFocus are listed as having holdings in Dorman Products. The Gurus page does show Chuck Royce (Trades, Portfolio) owning 1,190,780 shares as of Sept. 30, 2016, and Nasdaq.com reports the same number based on the latest 13F form. It also shows Columbia Wanger (Trades, Portfolio) with 333,907 shares—in both cases, the gurus may have divested all their shares since then.
Institutional investors own just over three-quarters of the company:
Insiders own a hefty chunk of the rest, particularly members of the founding Berman family:
Shorts are well represented as well, with nearly 10% of the outstanding shares. That, however, is much lower than the level of two years ago, as this GuruFocus chart show:
The fortunes of the founding, and to some extent controlling, family are closely tied to those of other investors. There is also a strong presence by institutional investors, which includes pension, mutual and hedge funds.
By the numbers
The current price (at close of trading Feb. 2) is 13.72% below the 52-week high, which was hit on Dec. 9, 2016; price-earnings (P/E) ratio in the mid-20s; good return on assets (ROA) and return on equity (ROE); no dividend; and the company bought back shares in fiscal 2015.
Financial strength
Very good marks for both financial strength and growth and profitability:
The company has no long-term debt, and has not had any since the end of fiscal 2009.
Revenues, as noted, are growing and reached $835 million for the 12 months ending Sept. 30.
Earnings have also grown; this chart shows EBITDA (earnings before interest, taxes, depreciation and amortization) over 10 years:
Earnings per share (EPS) is up as well:
This chart shows free cash flow over the past decade:
Dorman’s WACC (weighted average cost of capital) is 7.61%, well below its ROIC (return on invested capital) of 21.76%.
Dorman's management has grown the company steadily, on all key metrics, without using any debt since 2009.
Valuations
Dorman Products is a 5-Star (out of five) company, indicating a high consistency in growing its earnings. This predictability is considered one of the most important metrics at GuruFocus because the higher the predictability, the greater the odds the company will deliver capital gains and avoid capital losses.
The only GuruFocus valuation method that does not show Dorman as overvalued is DCF (earnings):
The DCF Fair Value calculator shows a 16% margin of safety for Dorman:
Among the analysts followed by Nasdaq.com, the 12-month consensus price target is $65, which is roughly 5% below its price at the close on Feb. 2.Ă‚
Dorman's P/E ratio has recently pulled back, along with the stock price, from its all-time high:
The PEG (P/E divided by five-year average EBITDA growth rate) is 1.58, in the middle of the fair value range.
In addition, the current share price is still above the 200-day Simple Moving Average, but moving back toward it:
Despite the pullback since Dec. 9, the indicators suggest Dorman to be a slightly overvalued company.
Conclusion
With 5-Star predictability and no debt, Dorman Products is a robustly growing, well-managed company. It has all the right metrics to keep growing and delivering capital gains over the years.
Dorman is not a company for strict value-seeking investors; the current pullback offers an entry position, but a shallow one. Nor is this a company for income investors, since it pays no dividend.
It does deserve a place on the shortlists of investors seeking growth with modest risk; it has no debt. Assuming it is able to continue growing its earnings, the share price should follow. As McBoyle said, “...it has had the ability to compound over many years.”
Disclosure: I do not own shares in any of the companies listed in this article, and I do not expect to buy any in the next 72 hours.
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