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Coverage Initiation: Dorman Products
We have recently introduced Dorman Products (DORM) to The Value Line Investment Survey. The company is a supplier of automotive replacement parts and fasteners and service line products primarily for the automotive aftermarket. About 85% of its products are sold under its brand names, with the remainder available for resale under customers’ private labels or other brands. Some of its primary brands include DORMAN OE Solutions, DORMAN HELP!, and DORMAN AutoGrade.
Dorman’s goods are sold primarily in the United States through automotive aftermarket retailers, including AutoZone, Advance Auto, and O’Reilly, as well as through national, regional, and local warehouse distributors, including Carquest and NAPA. The company was incorporated in 1978. As of December 31, 2010, it had 1,185 employees. Its portfolio of products includes about 122,000 different automotive replacement parts, fasteners, and service line products.
Dorman is off to a good start this year. It has been seeing strong overall demand for most of its products, with particularly robust growth from newer products. In fact, goods introduced in the last two years made up over 20% of total sales in the most recent quarter. This has been driven by management’s continued investments in R&D and SG&A. It has been committed to its New to the Aftermarket initiative, and expects to continue to commit additional resources in the coming quarters.
Business prospects look good for the remainder of the year. Management stated that it plans on having the largest number of new product releases in the company’s history this year, for both new and existing product lines, and this should help to drive results. However, higher research and development costs could temper some of the profit gains that we envision in the near term.
The company should continue to benefit from elevated unemployment levels and tighter credit in the United States. These conditions have resulted in slower growth of new vehicle sales and an increase in the average age of vehicles on the road. These trends ought to increase the number of automotive aftermarket parts that need replacing. Although an improving economic environment will likely lead to stronger auto sales in the coming quarters, we don’t believe that this will cause a significant decline in the average age metric in the near term.
Dorman also faces some risks. Due to ongoing consolidation among its customer base, the company now faces a more challenging environment. Clients have been seeking more favorable pricing, product returns, and extended payment terms when negotiating with Dorman. Margins will likely remain under pressure as a result of these concessions. To help offset these concerns, management has focused on efficiency improvements and product cost-reduction initiatives.
Another challenge pertains to new product development. As we mentioned, new products remain the primary driver of Dorman’s growth. As a result, if the company fails to produce a significant number of new products in the coming quarters, this could seriously hurt sales and profits. Quarterly sales are affected by the timing of such goods and, therefore, this could cause significant fluctuations in earnings from quarter to quarter. Transportation costs also have been on the rise in recent months, but we think management will be able to successfully pass these higher expenses along to customers.
The company maintains a healthy balance sheet with no debt. We think it will use some of its strong cash flow generation to fund capital expenditures. In fact, it recently announced that it is building a new Kentucky distribution plant that will be DORM’s largest distribution facility. Management could also use cash to repurchase shares in the coming quarters.
A strong product pipeline should help to drive sales and earnings growth over the next few quarters. As a result, we think Dorman Products is a sound investment at the present time.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.