DORM Stock Study (9-27-23)

Posted by Mark on December 26, 2023 at 06:43 | Last modified: September 27, 2023 11:37

I recently did a stock study on Dorman Products Inc. (DORM) with a closing price of $73.66.

M* writes:

     > Dorman Products Inc is a supplier of original equipment parts
     > for automobiles. The company produces automotive and heavy-
     > duty replacement parts, automotive hardware, brake parts, and
     > fasteners for the automotive and heavy-duty aftermarket. The
     > products are sold under the Dorman brand and its sub-brands
     > OE Solutions, Help!, Conduct-Tite, and HD Solutions through
     > aftermarket retailers, regional and local warehouse
     > distributors, specialty markets, and salvage yards. It
     > operates as a single reportable operating segment, namely,
     > the sale of replacement and upgrades parts in the motor
     > vehicle aftermarket industry, serving passenger cars, light-,
     > medium-,and heavy-duty trucks as well as specialty vehicles.
     > The company operates primarily in the United States.

Over the past decade, this medium-size company has grown sales and EPS at annualized rates of 9.4% and 5.8%, respectively. Lines are up, somewhat straight, and [I stretch to say] parallel. Admittedly, visual inspection is not great due to EPS declines in ’19 (big) and ’22 making growth look inconsistent [’23 looks to be challenging as well: see below]. PTPM leads peer and industry averages despite falling from 19.2% (’13) to 9.0% (’22) with a last-5-year mean of 12.5%.

Also over the past decade, ROE is roughly even with the industry and higher than peer averages while falling from 20.8% (’13) to 11.9% (’22) with a last-5-year mean of 13.7%. Debt-to-Capital is less than peer and industry averages despite increasing from 0% (through ’18) to 44.4% in ’22 with a last-5-year mean of 15.2%.

Interest Coverage is 4.0 and Quick Ratio is 0.9. Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects 17.6% YOY and 11.1% per year for ’23 and ’22-’24 (based on 4 analysts).
• YF projects YOY 14.3% and 6.0% for ’23 and ’24, respectively (3 analysts).
• Zacks projects YOY 14.2% and 6.9% for ’23 and ’24, respectively (3).
• Value Line projects 8.0% annualized growth from ’22-’27.
• CFRA projects 13.8% YOY and 10.2% per year for ’23 and ’22-’24, respectively (3).
• M* gives a 2-year ACE of 10.3% per year.

I am forecasting below the long-term estimate at 6.0% per year.

With regard to EPS growth:

• CNN Business projects 8.0% YOY and 11.7% per year for ’23 and ’22-’24, respectively (based on 4 analysts), along with 5-year annualized growth of 14.0%.
• MarketWatch projects 12.4% and 10.4% annualized for ’22-’24 and ’22-’25, respectively (4 analysts).
• Nasdaq.com projects 17.4% YOY and 11.8% per year for ’24 and ’23-’25 [4, 4, and 1 analyst(s) for ’23, ’24, and ’25].
• YF projects YOY 8.2% and 17.7% for ’23 and ’24, respectively (4), along with 5-year annualized growth of 15.0%.
• Zacks projects YOY 8.4% and 17.4% for ’23 and ’24, respectively (3).
• Value Line projects 13.2% annualized growth from ’22-’27.
• CFRA projects 34.3% YOY and 24.5% per year for ’23 and ’22-’24, respectively (3).

I am forecasting below the long-term-estimate range (mean of three: 14.1%) at 10.0% per year.

Determining the initial value is a bit more complex. 2023 EPS are tracking much lower than ’22 for the first six months. According to the 10-Q:

     > The increase in SG&A as a percentage of net sales was
     > primarily due to the impact of higher interest rates on
     > our customer accounts receivable factoring programs and
     > the addition of SuperATV, which has higher SG&A expenses
     > as a percentage of net sales than the Company average.
     > SG&A expenses as a percentage of net sales also increased
     > in the three months ended April 1, 2023 as a result of a
     > charge recorded related to a customer bankruptcy filing.

The bankruptcy filing is a nonrecurring event. SuperATV (recent takeover target) seems recurring. I don’t know if “factoring programs” are ongoing or nonrecurring and I don’t know how much of each contributes to the total difference.

Given the uncertainty, I feel the need to use the depressed EPS for initial value in an effort to be conservative. I do find it odd that no short- or long-term EPS projections are negative when 2023 Q1 and Q2 are tracking significantly below ’22 values. Nevertheless, I will use 2023 Q2 EPS of $2.76/share (annualized) as the initial value rather than ’22 EPS of $3.85.

My Forecast High P/E is 24.0. Over the past decade, high P/E ranges from 20.7 in ’15 to 38.0 in ’19 with a last-5-year mean of 30.4. The last-5-year-mean average P/E is 24.7. I am forecasting below the latter [only ’15 (20.7) and ’18 (22.7) are lower].

My Forecast Low P/E is 13.0. Over the past decade, low P/E ranges from 13.1 in ’16 to 26.3 in ’19 with a last-5-year mean of 19.0. I am forecasting below the entire range.

My Low Stock Price Forecast (LSPF) is $58.00. The default LSPF of $35.90 is 51.3% less than the previous close and 51.0% less than the 52-week low. I find this unreasonable. With the stock currently at the 52-week low, I am discounting 21.3% to get my LSPF. This implies a Forecast Low P/E of 58 / 2.76 = 21.0.

These inputs land DORM in the HOLD zone with a U/D ratio of 2.1. Total Annualized Return (TAR) is 7.7%.

PAR (using Forecast Average—not High—P/E) of 2.2% is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 32 studies (my study and 8 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.7%, 10.6%, 25.8, and 16.6, respectively. I am lower across the board [except perhaps for my implied Forecast Low P/E that has been effectively raised by overriding LSPF; I’ll see below whether MS has done the same]. Value Line’s projected average annual P/E of 20.0 is lower than MS (21.2) and mine (18.5).

MS high / low EPS are $5.50 / $2.78 vs. my $4.44 / $2.76 (per share). My EPS range is lower and my low EPS is lower. Value Line has high EPS at $8.85/share: much higher than both.

MS LSPF of $53.60 implies a Forecast Low P/E of 19.3, which is greater than the above-stated 16.6 [not nearly as big a difference as my implied Forecast Low P/E]. MS LSPF is 16.2% greater than the default $2.78/share * 16.6 = $46.15, which results in more aggressive zoning. MS LSPF is more conservative than mine, however, being 7.6% less.

My TAR (over 15.0% preferred) is much less than the 12.1% from MS.

Despite raising LSPF to something that seems reasonable at the moment, MOS seems robust in this study. My final buy/sell decisions are based more on TAR/PAR than they are upside/downside ratio. While the latter will qualify a potential BUY, I use the former to finalize it.

I track a few different [usually conflicting] valuation metrics. PEG of 2.4 based on my projected P/E suggests the stock to be overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* agrees at 1.1. Kim Butcher’s “quick and dirty DCF” prices the stock at 16.0 * [$11.40 – ($0.00 + $1.30)] = $161.60, which suggests the stock to be 54.4% undervalued [this strikes me as NMF as I continue to evaluate the utility of this metric].

DORM is a BUY under $70. With a forecast high price at $106.60, TAR should meet my 15% criterion around $53/share.