Who is Dorman Products Inc.? (DORM)
The company services the automotive aftermarket with replacement parts and fasteners for automobiles and heavy-duty trucks. With about 133,000 items that they designed and engineered themselves, they dominate the automotive aftermarket. 90% of the revenue is generated from North America (United States and Canada) and marketed through aftermarket retailers like AutoZone (AZO), Advanced Auto Parts and O'Reilly Auto Parts. Warehouse distributors such as Carquest Auto Parts and NAPA Auto Parts also distribute on a regional and national level.
How is the automotive aftermarket affected?
The recent recession and high unemployment has an influence on the automotive market. Vehicle owners are more likely to keep their current vehicles longer, performing the necessary repairs and maintenance to keep them running and well-maintained.
According to data published by the Automotive Aftermarket Industry Association, the average age of vehicles was 11.3 years as of January 2013, up from 10.3 years in January 2009. Another important statistic that impacts Dorman's business is the number of miles driven, which has increased slightly since 2009
The automotive aftermarket encompasses all products and services purchased for light medium and heavy-duty vehicles after the original sale of the vehicle. It is a very encompassing industry which will include replacement parts, accessories, lubricants, tires, collision repairs and all the tools and equipment necessary to make the repair.
The company's customer base has consolidated in recent years and this poses a number of different challenges:
- Customers regularly see more favorable pricing
- More favorable product returns
- Extended payment returns
In some instances, the company has had to grant these concessions. Obviously these concessions will impact profit levels and it is something it is going to have to continue to face as the customer base continues to consolidate.
How the Company Grows
The company also relies on new product development as its primary vehicle for growth. Quarterly numbers will also fluctuate because the timing of customer orders does not always coincide with quarterly reporting. While the first quarter of the year has generally been the most lax time for customer orders, new product line introduction to customers may also place significant fluctuations and numbers from quarter to quarter.
As an example, net sales increased 14% to $178.0 million for the thirteen weeks ended September 28, 2013, from $156.4 million for the thirteen weeks ended September 29, 2012. Its revenue growth was primarily driven by strong overall demand for its new products introduced 24 months ago.
Not only does the company manufacture new products, but it will acquire competitors when it deems necessary for expansion.
Re-Involt Technology Acquisition
One recent acquisition demonstrates a good example of how the company expands in the automotive aftermarket. When it bought Re-Involt Technology, the company was looking to capture a larger piece of the "replacement battery market." Re-Involt leads the automotive aftermarket and hybrid battery remanufacturing. Dorman does its own manufacturing, but will also make strategic acquisitions to expand the manufacturing of aftermarket auto parts when deemed strategically necessary.
How does the company finance its growth?
Using a combination of the following three elements, this is how the company has been able to grow:
- Cash flow from operations
- Accounts receivable sales program
- Revolving credit facility
The "accounts receivable sales program" has been particularly valuable over the last few years as the company finds itself extending payment terms to certain customers. Dorman is able to sell its Accounts Receivable to financials institutions that offsets the negative cash flow impact of the payment term extensions.
The "Automotive Aftermarket" is a multi-billion-dollar industry and the one segment we want to focus on is suppliers. As you can see from this graph together by the Automotive Aftermarket Industry Association (AAIA), the supply industry has experienced the most growth. As I mentioned earlier, this has been attributed to high unemployment and lower wages. People are keeping their used vehicles longer and electing to repair them instead of investing in new ones.
The automotive aftermarket supply industry is very broad and much of the competition is specialized. You may be familiar with well-known names like Cooper Tire & Rubber Co. (CTB); Snap-On, Inc (SNA) and Goodyear Tire & Rubber Co. (GT). These companies are all in the aftermarket supply industry but specialize in their field. Dorman Products produces a broad range of aftermarket automotive parts and has two main competitors in the supply market: Motorcar Parts of America, Inc. (MPAA) and Standard Motor Products, Inc. (SMP). Let's take a look at this competition side-by-side.
I created this chart in Yahoo Finance. If we look at these companies side-by-side over the last two years, Dorman has shown consistent growth throughout the period. Both Motorcar and Standard Motor had a brief downward trend in the spring of 2012 before they started to move up again.
The recent spike in mid-November by Motorcar is due to handily beating earnings estimates (coming in at $.36 which is nine cents higher than estimates) as well as the refinance of and $95 million loan at dramatically reduced rates which should translate into higher net income and earnings for investors.
A simple side-by-side "value" comparison MPAA and SMP came in pretty close while Dorman looks a bit more expensive. I am sure Motorcars numbers would look a bit more expensive if the recent Spike was included in these figures. These values are based on the companies' financial figures November 15 of 2013.
Investing in Dorman Products
While Motorcar Parts of America may have recently been a "growth investors" dream come true, Dorman Products is a trustworthy long-term growth investment. The used car market was healthy this fall and usually slows down this time of year, but is projected to be strong past 2014. This is the industry that helps these automotive aftermarket companies grow. Dorman, like its competitors, will continue to face price pressure from customers as everybody looks at their bottom lines. As the industry leader that has shown consistency I believe this small-cap company would be a good long-term growth/value investment.