Dorman: The Little Automotive Parts Supplier That Could

Looking for stable growth in a difficult market? Look to high quality small caps under $2 billion in market cap like 24% founding family owned Dorman Products (NASDAQ: DORM). This supplier of replacement parts and fasteners for light trucks, heavy duty trucks, and passenger cars in the automotive aftermarket is an excellent business whose product portfolio focuses on ‘niche’ offerings as the dominant aftermarket supplier of formerly ‘dealer only’ parts. The company has successfully grown sales year over year for over a decade and has been able to generate a 5 year net income CAGR of 14%. Net sales have been growing at a 5 year CAGR of 13% (all organic) and EPS has been growing at a 5 year CAGR of 14%. Gross margins and operating margins have remained steady at around 38% and 20% respectively.

Unsurprisingly, this company creates significant value with a solid 21.44% ROIC over a WACC of around 9.5%. ROE sits over 18% and the company has an incredibly strong and liquid balance sheet with no debt and a current ratio around 5.69. Free cash flow as a percent of sales has remained consistent for the last 8 years and the company’s free cash flow margin has averaged around 4.7% over the last 3 years which suggests strong cash flow generation.

As for price, although Dorman is currently trading at a P/E of around 20 vs. an industry average of 12, an earnings based DCF with a 14% growth rate decreasing to 7.5% over an 8 year period, a terminal growth rate of 3.5% and a WACC of 9.5% suggests a fair value of $69.73. The company has been firing on all cylinders yet competition remains fierce and a significant amount of the firm's sales are tied to a small number of customers, including the likes of O'Reilly, Advance Auto Parts, and other auto retailers. The strength of these retailers should be watched closely for clues as to Dorman’s vitality yet with the average age of active light duty vehicles on the road increasing, Dorman should be able to continue expanding market share while rewarding shareholders over the long term.

Disclosure: Logos LP is long DORM.