Here's Why Dorman Products Belongs In Your Portfolio
Summary
- Dorman Products distributes automotive parts that enable consumers to save money by keeping their old cars running longer.
- Dorman Products has taken advantage of the frugal mindset of the automotive consumer.
- Dorman Products has no long-term debt.
It's important for long-term investors to develop a guide for doing their investment research. Over the years I have developed questions to guide me in my thinking when researching the publicly traded universe. Let's talk about Dorman Products (NASDAQ: NASDAQ:DORM).
1.) What does the company do?
When you buy shares in a company you effectively become part owner of that company. Therefore, it's important for an investor to understand what a company sells. Dorman Products is an automotive and heavy duty truck parts distributor catering to dealers, other distributors, automotive parts retailers and salvage yards. It sells things such as radiator fan assemblies, tire pressure monitor sensors and exhaust manifolds. Some of the brand names it distributes parts under include Help!, First Stop and AutoGrade.
2.) What do the fundamentals look like?
Investors should look for companies that grow revenue and free cash flow over the long-term, retaining some of that cash for reinvestment back into the business and for economic hard times. Excellent revenue and free cash flow growth serve as catalysts for superior long-term gains. Over the past five years, Dorman products has increased its revenue, net income and free cash flow 85%, 139%, and 4%, respectively (see chart below).
DORM Revenue (NYSE:TTM) data by YCharts
Dorman Products' management is quick to point out that the primary driver of the top and bottom lines is the increasingly frugal nature of the American car consumer due to the last recession. Frugal consumers looking to forgo a large purchase in an effort to save money are certainly a strong demand catalyst for Dorman Products' parts. Moreover, new product introductions helped drive fundamental expansion.
Dorman Products is off to a slow start in FY 2015. In the most recent quarter, the company grew its revenue 3%, and its net income declined 9% year-over-year. However, its free cash flow expanded 337%. One of Dorman Products' clients had an inventory reduction. Heavy investments in a new enterprise resource system (ERP) also put a dent in the company's net income. Dorman Products went to great lengths to make sure customers were taken care of, even with the transition to the new system. This resulted in a temporary increase in distribution costs. Lower capital expenditures, as the majority of capital spending on the new ERP system is complete, customer cash collections, served as a catalyst for the expansion in free cash flow.
Dorman Products possesses an ok balance sheet. In the most recent quarter, the company possessed $64.6 million in cash, which equated to 13% of stockholder's equity. I like to see companies with cash in excess of 20% to get them through tough times. Long-term debt creates interest that chokes out profitability and cash flow. I prefer to see companies with long-term debt to equity ratios amounting to 50% or less of stockholder's equity. Dorman Products currently has no long-term debt on its balance sheet. In fact, its total liabilities only amount to 25% of stockholder's equity, which is pretty impressive.
Dorman Products strong fundamentals and prudent financial management has translated into a total return of 427% for its shareholders vs. 118% for the S&P 500 over the last five years as a whole (see chart below).
DORM Total Return Price data by YCharts
3.) How much management-employee ownership is there?
Investors should always look for businesses where the managers and/or employees own a lot of stock in the company. Managers with a great deal of stock in the company will take better care to maximize company profits, which will enhance share price and their personal wealth along with the wealth of shareholders. According to Dorman Products latest proxy, Steven Berman, Dorman Products' Chairman, CEO, Secretary and Treasurer; owns roughly 12% of the company's stock. This means that he definitely wants the company to succeed, as evidenced by the strong fundamentals illustrated above.
4.) How does its "Report of Independent Registered Public Accounting Firm" stack up?
Every year a company employs external auditors to audit financial statements and evaluate whether it maintains adequate financial controls. At the conclusion of the audit, you want to see a letter from auditors with the language "unqualified" or "fairly presents", which generally means that the financial statements and internal systems in constructing them were clean or adequate. If you see "qualified" or "adverse" in the auditing letter's language then deeper issues in a company's financial statements may exist. Last year, Dorman Products' auditors gave its financial statements a "presents fairly" opinion and internal controls an "unqualified" opinion.
5.) What types of risk does it have?
It's always important for investors to weigh the various risks, such as exposure to political risk in parts of the world where war is the norm, competitive positioning, and market price risk. Dorman Products does distribute parts in places such as the Middle East and Asia where political unrest can occur. However, the biggest part of its revenues comes from the United States.
The company believes it possesses dominance in "dealer exclusive" items, according to its SEC filings. This gives the company a competitive advantage. Dorman Products trades at a P/E ratio of 20.1 vs. 19.4 for the S&P 500, according to Morningstar. This makes the company's market price risk slightly higher than the market as a whole.
6.) What does its forward analysis look like?
I believe that Dorman Products' profitability will stabilize and resume its growth once its employees get used to using the new ERP system. According to management, improving efficiencies will help offset the cost of the system. Finally, Dorman Products deserves a long-term spot in your portfolio due to its tendency towards financial prudence, backed by management whose interests are aligned with shareholders at large.
This article was written by
Analyst’s Disclosure: The author is long DORM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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Comments (4)
financial institutions that permit us to sell certain accounts receivable at discounted rates to the financial institutions. Transactions under
these agreements were accounted for as sales of accounts receivable and were removed from our Consolidated Balance Sheet at the time
of the sales transactions. During fiscal 2014, fiscal 2013 and fiscal 2012, we sold $477.9 million, $406.4 million and $312.7 million,
respectively, pursuant to these agreements. If receivables had not been sold, $298.9 million and $267.8 million of additional receivables
would have been outstanding at December 27, 2014 and December 28, 2013, respectively, based on standard payment terms. ..."If I do the math right, in 2014 goods of $179.6 million are not sold, compared to $129.0 million in 2013. The numbers in 2012: $131.2 million, 2011: $70.5 million. All sales of Accounts Receivable: 2010: 104.3M
2011: 208M
2012: 312.7M
2013: 406.4M
2014: 477.9MThe growth of renvenue in the same time is 1.7 fold. The numbers sound bad, but I don't believe that this is a big problem. Such a big number of unsold stuff in the shelves of the stores is inpossible. Why should AZO and so on block their valuable shelves with stuff, they can't sell? (excuse my mistakes, I'm from Germany)
DORM growth has become entirely dependent on factored financing. You can only stretch that so far. This won't end well.
