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Dorman Products Looks Forward to a Brighter Future

By Dan Caplinger - Oct 25, 2016 at 9:06PM

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The auto-parts supplier had lackluster growth during the third quarter but thinks things will get better soon.

Providing parts for cars and trucks is a big business, and Dorman Products (DORM -4.19%) aims to meet the demand for high-end original equipment manufacturer parts in a way that nevertheless can save money. With its proprietary process, Dorman seeks to offer high-quality goods to customers at lower prices than they'd pay at a car dealership. Coming into its third-quarter financial report, Dorman investors expected that the company would keep benefiting from relatively strong conditions in the auto industry. Unfortunately, Dorman wasn't able to deliver the growth that shareholders had hoped to see, but it believes that the future looks brighter. Let's take a closer look at Dorman Products with an eye toward figuring out what's ahead for the parts-maker.

Image source: Dorman Products.

Dorman runs out of gas -- briefly

Dorman Products' third-quarter results didn't match up well with some of its past performance. Revenue gains were limited to just 1%, with Dorman posting $212.8 million in sales, well off the $226 million consensus forecast among investors. Similarly, net income rose just 2% to $26.7 million, and that produced earnings of $0.77 per share. That missed the $0.81 per share that those following the stock had expected to see.

As we've seen in past quarters, however, Dorman pointed to extraordinary activity in the year-ago period that might have skewed its results compared to longer-term trends. Dorman said that its third-quarter 2015 results included substantial orders from a major customer, and that helped push sales higher during the year-ago period. Without that influence, it's much more likely that Dorman's growth rates would have been higher and more in line with what it has produced recently.

Dorman continued to highlight the need for managing costs. Gross margin improved by nearly a full percentage point to 39.1%, and the company pointed to a favorable sales mix and better inventory control in reducing the need for write-offs. However, overhead expenses outpaced overall revenue growth, rising 5% from the year-ago period. That put pressure on Dorman's operating margin, although again, such impacts could be temporary if year-over-year comparisons become less difficult in future quarters.

Dorman also kept adding new products to its lineup. The company added 977 new unique SKUs to its overall list of available products, and that should help to drive growth into the future.

CEO Matt Barton talked about why he was optimistic about Dorman's future. "We expect the unfavorable impact of the strong stocking order comparisons in the third quarter to reverse in the fourth quarter," Barton said, and "customer sell-through rates stabilized in the quarter and were basically at the same rates that we saw in the second quarter."

What's down the road for Dorman?

Dorman has high expectations for the future. "We continue to expect full year 2016 sales growth to be in the 6% to 7% range, and we also expect reported 2016 EPS growth to be in the mid-teens range."

In part, Dorman is building its reputation in an effort to pick up new business. For instance, during the quarter, Dorman won a new chassis business from a major customer, and shipments related to that business should begin during the fourth quarter. Overall, Dorman expects to see organic revenue and net income grow by mid- to high single-digit percentages in 2017, and investment in new capabilities should help the company take advantage of future opportunities more effectively.

Investors in Dorman Products seemed to accept the explanation for the company's lackluster sales performance, and they sent the stock upward by more than 2% following the Monday morning announcement. As long as the auto industry keeps generating solid performance, Dorman should remain in a position to capitalize on it and return to a more impressive growth trajectory for its fundamental business.

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