Back in January, I singled out Dorman Products
The million-mile club
U.S. auto sales have made a slow but steady climb out of the recession. A spike in February marked a 60% improvement over the low in February 2009, and while sales in March and April weren't quite as good, the trend is still on track. That's good news for auto companies such as Ford
The fact is, people are buying fewer cars and keeping them longer. The average age of a car or truck in the United States reached a record 10.8 years in 2011, up from 8.4 in 1996. An older fleet of cars is good for replacement parts retailers such as AutoZone
Dorman is uniquely poised to take advantage of the trend, with a parts catalog of 122,000 replacement parts, about 21% of which were previously only available through the original equipment manufacturer.
They don't make 'em like they used to -- which is a good thing
There's a flip side to the aging trend in autos, however. It used to be that a mechanically inclined car owner could basically build and rebuild his car in a cave with a box of scraps. Nowadays, even Tony Stark might have trouble repairing the increasingly small, computerized, self-contained parts in new cars. If those kinds of parts wore out as often as they used to, owners might just have to junk them for a new one like so many irreplaceable-battery iPhones. Manufacturers have an incentive to make sure these parts last or else become known for producing very large, expensive bricks.
Fortunately, newer technologies and manufacturing techniques are available to help in this regard. For instance, in its newer EcoBoost engines, Ford is using a diamond-like carbon finish on some of the parts, which show virtually no evidence of wear even after an exhaustive 250,000-mile testing.
If people are keeping their cars longer simply because they can, and not because they have to out of economic necessity, then the trend may not necessarily be in Dorman's favor. To use a morbid comparison, the casket industry in America has been declining for years despite our aging demographics -- we have an older population because people are living longer.
The road ahead
Whatever the reason for an aging auto fleet, there's no doubt that Dorman is doing something right. Whether it's a recession threatening customers' pocketbooks, or a recovery threatening to boost new auto sales and push the repair business onto the sidelines, Dorman's profits keep marching higher. It's hardly just riding a wave, either. At 17.3% and rising, Dorman has close to the best operating margin in the industry. By comparison, fellow parts maker Johnson Controls
It's hard to make a bear case against Dorman, but it's also hard to see the continuing value opportunity. The stock isn't priced for perfection, but neither is it priced for doom. It has, however, hit my fair value estimate, and I can't find any reason to move that estimate higher just to keep it in my CAPS portfolio. I've decided to end my CAPS pick, but I am also adding Dorman to My Watchlist, and will continue to watch for an opportunity to get back in. I suggest you do the same.
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