Dorman Products Stock: The average age of U.S. cars is rising (NASDAQ:DORM)

Synopsis

Dorman products (Nasdaq:dormitory) specializes in the distribution of replacement and upgrade parts for the automotive aftermarket industry. Currently, the company is a major supplier of these products. DORM’s financial results for the past three years have shown solid sales growth.However, that Profit margins show mixed results. In its latest Q1 2024 financial results released on May 7, 2024, the company reported continued growth in net sales. Additionally, margins expanded year-over-year in Q1 2024. Looking ahead, new product launches, strong fleet numbers, and DORM’s efforts to address vehicle aging trends are expected to strengthen DORM’s growth prospects. I rate DORM a buy due to the potential for double-digit price appreciation.

Summary of previous interview

Before we move on to the latest information about DORM, let me summarize the previous articles.my previous post, I recommended a buy rating for DORM, and that decision was determined by several factors. This includes management’s aggressive efforts to reduce the company’s debt levels and anticipated growth in the U.S. auto aftermarket and global auto sales, which are expected to strengthen DORM’s growth prospects. Masu. In my previous post, my relative valuation model indicated a price target of $90.46. So far, DORM’s current stock price is already above my target price.

Historical financial analysis

DORM’s historical financial results show significant growth in net sales over the past three years. In 2021, DORM reported net sales of $1.345 billion.in 2022, increased 29% to $1,733 million. Significant net sales growth in 2022 dayton parts in 2021 super atv, an increase in new product launches, and price increases to offset the impact of inflation on costs. Even excluding the benefits of both acquisitions, organic growth remains substantial at 13.8% year over year.in 2023, net sales continued to grow, reaching $1.929 billion. This strong growth in 2023 was driven by contributions from the acquisition of SuperATV, price increases to combat inflation, and increased volumes.

In terms of profit margins, results have been mixed. First, DORM’s gross profit margin expanded from 32.60% in 2022 to 35.50% in 2023. This gross margin expansion is due to the acquisition of SuperATV, which generates a higher gross margin than DORM. Additionally, management’s cost-cutting efforts and decisions to raise prices to offset inflationary pressures also contributed to the expansion. As a result of the gross profit expansion, DORM’s operating margin increased from 9.87% in 2022 to 11.13%. Selling, general and administrative expenses increased, but this was offset by an increase in gross profit.

However, looking at DORM’s adjusted net profit margin, it clearly shows a downward trend. The adjusted net profit margin in 2021 was 11.03%, which decreased to 7.42% in 2023. This contraction was driven by increases in SG&A expenses and net interest expense. SG&A expenses as a percentage of sales in 2021 was 21.7%, compared to 24.4% in 2023. Net interest expense as a percentage of net sales was 2.5% in 2023, compared to 0.2% in 2021.

First quarter earnings results analysis

In case of dormitory 1st quarter of 2024On May 7, 2024, the company reported net sales of ~$468.7 million, up 0.4% year over year, compared to $466.7 million in the prior year. Moderate growth is due to new product launches and price increases to offset inflation. DORM’s sales are divided into three categories:

Looking at segment performance, light vehicles continued to perform well, while heavy duty and special vehicle segments were weak. The light vehicle segment increased by 3%, while the heavy vehicle and special vehicle segments were -15% and 1%, respectively. Although the heavy goods division was down 15% year over year, net sales in 1Q24 were only about 12% of total net sales. DORM’s main segment is light duty, accounting for approximately 76% of its total net sales, and this segment has shown solid growth in the current quarter.

The double-digit decline in the large cargo sector was due to a decline in cargo industry shipments from January to March 2024. Additionally, the previous Q1 2023 was considered a tough comparison period as customers were replenishing their inventory with the end of the global pandemic.

Looking at DORM’s P&L, we see that all three types have significantly expanded margins. DORM’s gross margin expanded 7.7% from 31% in Q1 ’23 to 38.7% in Q1 ’24. This strong gross margin expansion was driven by lower inventory costs, DORM’s cost reduction efforts, and price increases to offset the cost impact of inflation.

DORM’s operating margin and adjusted net margin increased as a result of the significant expansion in gross margin. DORM’s operating margin expanded from 3.9% in Q1 ’23 to 11.6% in Q1 ’24 to 7.7%. DORM’s adjusted net margin increased from 3.76% to 8.71%. DORM’s adjusted diluted EPS for the first quarter of 2024 increased 134% to $1.31 per share, compared to $0.56 per share in the prior quarter. Overall, DORM’s 1Q24 margins and EPS look solid.

Commitment to product innovation and launch

new Product development And launches were, and continue to be, critical to DORM’s success and growth. DORM continues to make additional investments in product development initiatives. In the first quarter of 2024, DORM launched his 1,440 new products into the market. In fiscal 2023, a total of 6,106 new products were launched.

One of the key areas where DORM is looking to grow is in complex electronics programs. The program aims to capitalize on the increased use of electronic components by original equipment manufacturers (OEMs). New cars now have around 100 electronic modules, and luxury cars use even more. Currently, DORM is the market leader in this field. Therefore, our continued efforts and efforts to enhance our product offerings in this area are expected to strengthen our market-leading position.

Robust vehicle in operation

One of the key factors influencing DORM’s financial performance is the number, age, and condition of its vehicles in service (VIO) in the United States. DORM’s products are mainly used in passenger cars and light vehicles, especially those aged 8 to 13 years. Each year, the U.S. seasonally adjusted annual rate (American state of Saar) new car purchases will be added to VIO.

The U.S. SAAR declined from 2008 to 2011 as the 2008 financial crisis caused consumers to buy fewer new cars. As a result, VIO from 8 to 13 years ago in 2016 was adversely affected. After 2011, consumers started buying new cars again, helping the U.S. SAAR return to normal levels. As a result, DORM’s primary 8-13 year old VIO has also started to recover and grow in recent years. Therefore, this growth is expected to increase the demand for aftermarket replacement parts, strengthening DORMS’ growth prospects.

Cars are getting older

Based on S&P global mobility, the average age of vehicles on U.S. roads has reached an all-time high of 12.5 years, which falls squarely within DORM’s primary VIO subsegment. The average age of a U.S. car has increased consistently over the past six years. The reasons behind the aging population are supply chain constraints that affect new car inventory levels, rising interest rates, and inflation that suppresses consumer demand.

As your car ages, the number of repairs and maintenance it requires to keep it running and safe on the road also increases. The number of vehicles that are six to 14 years old is expected to grow by about 10 million more by 2028, according to S&P. Therefore, this fleet aging trend is expected to provide DORM with the necessary tailwinds for future growth. Because we operate in the automotive aftermarket industry.

Relative evaluation model

According to Seeking Alpha, DORM operates in the auto parts and auto equipment industry, specializing in the distribution of auto parts for the aftermarket industry. I will evaluate DORM relative to its industry peers in terms of growth prospects and profitability.

First, DORM has significantly outperformed its peers in terms of growth prospects. DORM’s future earnings growth rate is 6.45%, which is 3.64x his peers’ median of 1.77%. Turning to profitability margins, DORM also significantly outperformed its peers in both his trailing 12-month EBITDA margin (TTM) and net profit margin TTM.

DORM’s EBITDA margin TTM is reported at 18.17%, compared to the median of its peers at 10.89%. This equates to 1.67x his peer median. Second, DORM’s net profit margin TTM is 8.10%, which is also higher than the peer median of 3.23% and 2.51x the peer median. Overall, DORM has outperformed its peers in both growth prospects and profitability, which is a welcome sign.

DORM’s forward price/earnings ratio (P/E) is currently 16.74x, which is lower than the median P/E of its peers at 17.74x. Given DORM’s superiority in both growth prospects and profitability, I believe DORM’s P/E ratio should be trading at the median of its peers.

The market estimates DORM’s 2024 revenue to be approximately $2 billion and 2024 EPS to be approximately $5.57 per share. Considering the growth drivers discussed in the section above, the market predictions are legitimate and reasonable. Additionally, management puts his 2024 revenue guidance at ~3% to 5% growth, which equates to ~$2 billion using the midpoint of the range. Management also guided for 2024 EPS to be between $5.40 and $5.70. This guidance further justifies market expectations. Applying my 2024 P/E target of 17.74x to DORM’s 2024 EPS estimate, my 2024 price target is $102.36.

danger

As previously mentioned, DORM’s financial performance is correlated with its condition, age, and number of vehicles in operation. In 2008, the global financial crisis had a severe impact on consumer purchases of new cars. As a result, in 2016, DORM’s main VIO sub-segment, namely vehicles between 8 and 13 years of age, was affected. Currently, the macroeconomic situation is uncertain and unstable. If it turns south, it could impact US SAAR, which in turn would impact DORM’s major VIO subsegment in the coming years.

conclusion

In conclusion, DORM’s historical financial results demonstrate strong net sales growth driven by acquisition and pricing activity. However, it is worth noting that the adjusted net profit margin in 2023 decreased due to an increase in net interest expense and SG&A expenses. On May 7, 2024, DORM announced his 2024 Q1 financial results and continued to report net sales growth. Additionally, all profit margins expanded year-on-year.

Going forward, DORM’s consistent and unwavering commitment to new product launches is expected to support sales growth as it is a critical factor for DORM’s success and growth. Additionally, the combination of robust operating fleet numbers and aging fleets is also expected to drive DORM’s growth. I reiterate my buy rating on DORM as my price target has double-digit upside potential.