Have you ever researched a company before tossing it aside for some frivolous reason, only to check back a couple of years later to see its stock up huge? My stock was Dorman Products
Back in 2009, while everyone was fretting over sales at auto companies like Ford
Dorman reported beautiful third-quarter results recently, with revenues for the quarter up 22% over last year. While cost of goods sold and selling, general, and administrative expenses increased as well, they did so at a lower rate. Cost of goods sold dropped from 64% of sales to 62.1%, and SGA expenses fell from 22.8% to 20.7%. Overall, net income margin increased from 8.1% to 10.8%.
One red flag did pop out at me. Despite increases in revenues and profit margins, cash flow from operations remained flat year to date, compared to the same period last year. Subtracting capital expenditures gives us free cash flow for this period, which is a startling $5 million less than it was year to date last quarter. This means that free cash flow for the third quarter was negative $5 million, which is enough to have me worried.
However, free cash flow for the last several quarters has been very strong, and the sudden dip can be attributed to a rise in inventory and accounts receivable, which the company attributes to sales growth. For now, I'm willing to give it the benefit of the doubt and consider the cash flow dip as a necessary concession to grow sales.
Fellow Fool Andrew Bond thinks Dorman is still a value, and while I'd like to wait for a better entry price, he's probably right. I'm seriously thinking about scooping up some shares now, before I let this one get away a second time.
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