Dorman Products: The Time For An Upgrade Is Here At Last (NASDAQ:DORM)

One of the most important traits that successful investors have is the ability to remain flexible. Our opinions should change as the data changes. When good news comes in, we should incorporate that into our prior views. And the same holds true when bad news comes in. And yet, in practice, that’s not always easy to do. The latest example of me taking my own words to heart involves a company called Dorman Products (NASDAQ:DORM). For those not aware of the business, it is a supplier of aftermarket parts for the automotive industry.

Back in September of last year, I had revisited the company after previously rating it a ‘hold’. Leading up to that time, shares had underperformed the broader market. And yet, because of how the stock was priced and the continued weakness that we were seeing, I was not yet ready to rate it anything higher than a ‘hold’. That ended up holding true through all of last year and into early this year as well. The good news, however, is that management just came out with some new data. Although the stock is up 5.3% since I last wrote about the firm, that pales in comparison to the 14.1% rise seen by the S&P 500. Add on top of this how well the company performed on the bottom line for the final quarter of its 2023 fiscal year and how shares are priced on a forward basis, and I believe that a modest upgrade to a soft ‘buy’ is logical at this time.

A solid quarter

After the market closed on February 26th, the management team at Dorman Products announced financial results covering the final quarter of the company’s 2023 fiscal year. For the most part, the quarter was relatively stable. Yes, revenue did fall year over year, dropping 1.4% from $501.3 million to $494.3 million. This is discouraging. However, the sales only fell short of expectations set by analysts by $0.5 million. In the grand scheme of things, that’s a rounding error. According to management, the drop in revenue was entirely attributable to the Heavy Duty segment of the company. Sales plummeted about 12% from $65.4 million to $57.4 million. However, it’s important to keep in mind that revenue was impacted by the fact that, in the 2022 fiscal year, the company had an extra operating week. That was responsible for about $19 million in revenue, according to management. Adjusting for this, overall revenue would have risen by about 3% year over year.

On the bottom line, the picture was far more impressive. The company reported earnings per share of $1.60. This exceeded analysts’ forecasts by $0.14 per share. And adjusted earnings per share of $1.57 exceeded forecasts by $0.16 per share. As a result of these per share figures, net profits went from $17.8 million to $50.3 million. The company benefited from an improvement in its gross profit margin from 31.5% to 39.3%. Lower cost inventory, price increases levered onto customers, and the addition of SuperATV that the company acquired for $509.8 million in October 2022, all added to this improvement. Other profitability metrics followed a similar trajectory. Adjusted net income went from $31.8 million to $49.5 million. Operating cash flow rose from $12.3 million to $59.6 million. Normally, I also like to adjust this for changes in working capital. But management has not yet disclosed what that data looks like. And lastly, EBITDA for the company rose from $46.3 million to $91.2 million.

The very small weakness on the top line did not stop overall revenue for 2023 from coming in strong. Sales of $1.93 billion came in 11.3% above the $1.73 billion generated one year earlier. The aforementioned acquisition, combined with higher pricing aimed at offsetting inflationary pressures, not to mention the introduction of new products, all worked to push revenue up during this time. As you can see in the chart above, net profits, operating cash flow, and EBITDA all increased nicely year over year. Adjusted net profits did decline very modestly. But outside of that, the overall picture for shareholders is looking up.

When it comes to the 2024 fiscal year, management anticipates revenue growth of between 3% and 5%. In general, the industry in which it operates is growing. However, it’s also important to keep in mind that the company has a pretty good track record of increasing its addressable market by means of acquisitions. SuperATV added $8 billion to the company’s potential upside in the long run because it involves the specialty vehicle market. And back in 2021, management acquired Dayton Parts, which allowed it to get into the $22 billion a year heavy duty market. That has allowed its market opportunity to expand from $135 billion prior to these acquisitions to $165 billion.

With this growth potential on the top line also comes improvement on the bottom line. Management is forecasting earnings per share of between $4.71 and $5.01. At the midpoint, that would be $4.86 which would beat out the $4.10 reported for 2023. Adjusted earnings per share, meanwhile, should be between $5.40 and $5.70. That will allow it to outperform the $4.54 per share generated last year. That would imply adjusted net income, at the midpoint, of $174.8 million. No guidance was given when it came to other profitability metrics. But if we assume that they will increase at the same rate that net profits are expected to, we would anticipate operating cash flow of $254.9 million and EBITDA of $329 million.

Using these figures, I was able to value the company as shown in the chart above. Using the 2023 figures, the stock looks perhaps slightly undervalued. But it does look undervalued for sure on a forward basis for 2024. Of course, we should also look at the picture through the lens of similar enterprises. I then compared the 2023 figures to the figures for five similar firms. Those can be seen in the table below. On a price to earnings basis, Dorman Products actually ended up being the cheapest of the group. Three of the five firms were cheaper than it on a price to operating cash flow basis. And two of the five were cheaper when it came to the EV to EBITDA approach.

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Takeaway

From all that I can tell at the moment, investors should be fairly happy with the news reported by management. The company exceeded forecasts where it counted most. On top of this, guidance for 2024 looks promising. I wouldn’t exactly call this a home run. But I would agree with the market’s sentiment, which has pushed the stock up 4.7% in after-hours trading. Given all that we have looked at here, I would say that upgrading the stock to a soft ‘buy’ is logical at this time.