DORM Stock Study (6-5-24)

Posted by Mark on July 13, 2024 at 08:17 | Last modified: June 5, 2024 11:01

I recently did a stock study on Dorman Products Inc. (DORM) with a closing price of $90.15. The previous study is here.

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 last 10 years, this medium-size company has grown sales and EPS at annualized rates of 10.7% and 5.2%, respectively. Lines are up, somewhat straight, and [I stretch to say] parallel. Admittedly, visual inspection is mediocre due to EPS declines in ’19 (big) and ’22 making growth appear inconsistent.

Over the past decade, management metrics are trending the wrong way. 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%. ROE is roughly even with the industry and leading peer averages despite falling from 19.9% (’14) to 11.4% (’23) with a last-5-year mean of 12.3%. Debt-to-Capital is less than peer and industry averages despite increasing from 0% (through ’18) to 36.3% (’23) with a last-5-year mean of 22.5%.

Interest Coverage is 5.4 and Quick Ratio is 1.1. Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 4.0% and 4.3% for ’24 and ’25, respectively (based on 2 analysts).
• Zacks projects YOY 3.6% and 4.6% for ’24 and ’25, respectively (3 analysts).
• Value Line projects 5.3% annualized growth from ’23-’28.
• CFRA projects 3.6% YOY and 4.1% per year for ’24 and ’23-’25, respectively (3).
• M* gives a 2-year ACE of 4.6% per year.

I am forecasting toward the low end of the range at 4.0% per year.

With regard to EPS growth:

• MarketWatch projects 26.7% YOY and 19.2% per year for ’24 and ’23-’25, respectively (based on 3 analysts).
• Nasdaq.com projects 11.5% YOY for 2025 (3 analysts).
• YF projects YOY 24.2% and 11.5% for ’24 and ’25, respectively (3), along with 5-year annualized growth of 15.0%.
• Zacks projects YOY 24.2% and 11.5% for ’24 and ’25, respectively (3).
• Value Line projects 13.8% annualized growth from ’23-’28.
• CFRA projects 37.6% YOY and 23.9% per year for ’24 and ’23-’25, respectively (3).

My 10.0% forecast is well below either long-term projection (mean 14.4%). I just don’t have a lot to go on with 2-3 estimates behind each number (Zacks and YF even seem to duplicate each other on YOY EPS). I think greater uncertainty warrants a more conservative forecast.

Initial value is ’23 EPS of $4.10 rather than 2024 Q1 $4.97/share (annualized).

My Forecast High P/E is 22.0. 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 30.8 and a last-5-year-mean average P/E of 24.9. I am near the bottom of the range (only ’15 is lower).

My Forecast Low P/E is 14.0. 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 18.9. I am forecasting toward the bottom of the range [only ’16 and ’20 (13.5) are lower].

My Low Stock Price Forecast (LSPF) of $57.40 is default based on initial value from above. This is 36.3% less than the previous close and 4.3% less than the 52-week low.

These inputs land DORM in the HOLD zone with a U/D ratio of 1.6. Total Annualized Return (TAR) is 9.6%.

PAR (using Forecast Average—not High—P/E) is less than I like to see for a medium-size company at 5.3%. 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 29 studies done in the past 90 days (my study and 6 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 6.4%, 9.9%, 27.0, and 16.6, respectively. I am lower on all but EPS growth (10.0%). Value Line projects a future average annual P/E of 20.0 that is less than MS (21.8) and greater than mine (18.0).

MS high / low EPS are $7.26 / $4.35 versus my $6.60 / $4.10 (per share). My high EPS is less due to low EPS. Value Line’s high EPS of $9.30 is much greater than both.

MS LSPF of $66.30 implies a Forecast Low P/E of 15.2 versus the above-stated 16.6. MS LSPF is 8.2% less than the default $4.35/share * 16.6 = $72.21, which results in more conservative zoning. MS LSPF is 15.5% greater than mine, however.

TAR (over 15.0% preferred) is much less than MS 16.2%. Despite the small MS sample size, I believe MOS to be robust.

With regard to valuation, PEG is 1.7 per my projected P/E: roughly fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] is cheap at 0.74.

Declining estimates over the past nine months combined with stock price near the YTD high make for a tough investment proposition right now. In case my LSPF is unreasonable, I would feel comfortable raising to the 52-week low thereby adding two points to the next number you read.

DORM is a BUY under $79/share. All else remaining equal, the BI TAR criterion will be satisfied ~$73 given a forecast high price ~$145.