Dorman Products (NASDAQ:DORM) was one of my first ideas after the Q4-08 plunge in economy, and it remains perhaps my favorite idea today despite tripling in price from the low. I like the stock because of its combination of rapid growth and rock-bottom valuation. The maker of OEM replacement auto parts is riding the secular theme of used cars staying on the road longer. As you can see from the chart, it's been a nice ride (click to enlarge):
I first wrote about DORM in early 2009 and then followed up in May after it was clear that the company had some operating traction. I have stuck with the stock pretty much the whole time in the Top 20 Model Portfolio, though we have traded around the position. After their blow-out report, we added to our already above-average position, increasing our exposure to 9%. What gives me confidence?
- Relative Valuation
- Insider Ownership
- Institutional Sponsorship
- Strong Technicals
The growth has been progressing steadily. In the most recent quarter, sales grew organically by almost 20%. This follows two quarters of double-digit growth. Over the years, the company has grown typically at 10%, but it appears to be enjoying this secular change. EPS growth has been even stronger due to improved margins.
Valuation remains below the market and well below the EPS growth potential. The stock is trading at just 11X trailing EPS. My projection for 2010 is that the company earns almost $2.50. I expect the growth to be more modest in the coming years, but it should be able to achieve $>3 per share by 2012 assuming single-digit sales growth. Additionally, the company has net cash per share of $1. Historically, the stock has traded above 6X EV/EBITDA, but it currently trades near 5X despite stronger growth than is typical and much better trading volume. I think that the stock should trade to 38 over the next year based upon achieving just a 13X forward PE.
DORM sells the majority of its sales through three customers: OReilly (NASDAQ:ORLY), Advanced Auto Parts (NYSE:AAP) and Autozone (NYSE:AZO). While DORM trades at 5X EV/EBITDA, the customers trade 8-10X.
The Bermans own almost 1/3 of the company. They have trimmed a little, but their holdings are substantial.
While it isn't clear who the big seller was last month, Q1 data, the most recent available, shows several very large holders: Royce at 13%, T. Rowe Price (NASDAQ:TROW) at 7%, and DFA at 6%. Combined with insiders, more than 1/2 the stock is locked up.
Finally, back to that chart... The stock broke out of multi-year resistance in 2009 near 14, offering a big base to build from. While the stock got ahead of itself a quarter ago, it has consolidated nicely. The move from 15 to 26 saw a 72% retracement in a flag, but the stock has broken out of that formation.
Great theme, cheap stock, good technicals, high insider ownership, good institutional sponsorship... Now you know why we have 9% of the Top 20 Model Portfolio invested in DORM.
Disclosure: Long DORM in a model portfolio.