Dorman Products, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Dorman Products, Inc. is a leading supplier of replacement and upgrade parts for the motor vehicle aftermarket industry, serving passenger cars, light- and heavy-duty trucks, as well as specialty vehicles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Dorman Products is not a typical business to understand - it’s not a tech company or a traditional consumer staple company. It is a middle man that creates replacement parts in aftermarket, which makes it harder to understand compared to traditional businesses.

Business Overview

Dorman Products, Inc. operates in the highly competitive automotive aftermarket, focusing on designing, manufacturing, and distributing a wide range of replacement and upgrade parts. These parts are sold through both traditional retail channels and e-commerce, mainly in the United States, but also in Canada, Mexico and Middle East regions. Dorman has a diverse product portfolio spanning across several categories and vehicle types.

Revenue Distribution and Trends

The company serves three distinct segments:

  • Light-Duty Vehicle Aftermarket: This segment focuses on parts designed for passenger cars and light trucks, and is their largest segment, representing 75% of their sales. The light-duty vehicle aftermarket is expected to see continued growth due to the aging vehicle fleet and increasingly complex vehicle components.
  • Heavy-Duty Vehicle Aftermarket: This segment includes original equipment (OE), manufacturers, independent distributors, and repair shops. This segment accounts for $219 million in their latest FY sales and will see demand from OEMs and from those independent providers.
  • Specialty Vehicle Aftermarket: This segment includes parts used in power sports and off-road vehicles. Their sales in this segment have had a lot of growth this last year and is expected to remain strong due to increasing demand from those customer markets.

Dorman’s largest segments are highly fragmented with lots of players which makes it hard to maintain high ROICs due to competition. However, Dorman’s brand and history may help them maintain ROIC a little higher than peers.

Margins

Gross profit margins for Q3 of 2024 were 36.3%, while adjusted operating margin was 14%. The company has shown an average gross margin of about 35.5% with an average operating margin of around 12-13% in the last few years. There has been some volatility in margins due to inflation, raw material price increase, and change in customer mix and sales mix (which varies by segments). The company is trying to expand into higher-margin products, new product introductions, and cost-cutting measures in order to maintain margin.

Dorman’s gross and operating margins were affected by many factors that include inflation, customer mix, sales mix, and supply chain disruption. It will be interesting to watch if they can regain their margins in the future.

Competitive Landscape

The automotive aftermarket is highly competitive, and Dorman faces competition from several sources:

  • Original Equipment Manufacturers (OEMs): OEMs often sell their parts directly to consumers or through authorized dealerships.
  • Other Aftermarket Parts Suppliers: Many companies compete in specific product categories.
  • Retailers: Major retailers such as AutoZone, O’Reilly, and Advance Auto Parts.
  • E-commerce platforms: Online retailers like Amazon and eBay.

Dorman faces intense competition which makes it hard for them to get good pricing and makes it hard to retain existing customers. The company can’t depend on customer loyalty because customers are willing to buy based on the lowest cost provider. This makes it hard for them to have pricing power and build a wide moat.

What Makes Dorman Different?

Dorman differentiates itself through several key strategies:

  • Focus on “Hard to Find” Parts: Dorman specializes in replacement parts that are often difficult for customers to find through the OEM channel, or those are no longer produced by the OEM. By filling these gaps in the market they provide great value to their customers.
  • “First-to-Market” Advantage: They focus on getting new products to the market faster than their competitors. By being an early player they capture most market share before competitors can develop similar parts, which helps them to maintain sales and revenue momentum.
  • Engineering Expertise: The company has an engineering-led structure that allows it to focus on manufacturing products with quality and specifications that suit the complex needs of the aftermarket.
  • Distribution Network and Speed: By having a strong distribution network they can supply parts quickly and reliably to their customers.
  • Brand Recognition: A brand name built over 100 years.

Financial Analysis

Dorman Products has experienced some struggles recently, but this is from recent economic downturn and issues that are expected to pass with time. They have been focusing on growth opportunities, better margins, and cost cutting which will likely help them in the coming years.

Looking at the most recent quarterly earnings call (Q3 2024), Dorman has shown an increase in sales compared to last year. They also improved their operating margins to almost 14%. Net sales increased to $525.4 million a 2.1% increase, but that number doesn’t include sales of a recently acquired business SuperATV, which would have increased the net sales by 6.4%. They also lowered their operating expenses by $4.6 million as they continue to take cost cutting measures, and that led to an operating margin of 13.9%. The company expects some cost increases to affect profitability due to shipping costs and raw material costs. They have been aggressively looking for growth opportunities like the acquisition of SuperATV. They are still on pace to continue to meet their guidance. Looking at the past performance, their net sales is increasing every year since 2020, and so are their profits and cash flow, though, 2022 was particularly great. The company had record revenues, but the costs associated also pushed margins lower compared to 2020 and 2021. Their ROIC has been good, between 14 to 18% in the past.

The company’s balance sheet has improved significantly over the past couple of years. Debt-to-equity is still low which is ideal. Company has a good amount of cash which provides the company enough flexibility. Dorman also has high liquidity, that shows how easily they can fulfill debt obligations. The working capital level is also good for normal operations.

Moat Analysis

Moat Rating: 2/5

Dorman Products possesses a narrow moat, rather than a wide one. Here’s a breakdown of the rating:

  • Intangible Assets: Dorman has built a brand name in aftermarket parts over 100+ years, which allows them to have slight pricing power in the market. The brand also attracts loyal customers that prefer their quality and performance. There is some value with intangible assets but it is not huge.
  • Switching Costs: These are low, since it’s not hard for customers to switch to another auto part provider if a better deal is available.
  • Network Effect: There is no benefit with network effects, since they are selling physical parts, and that doesn’t inherently gain benefit from network economics.
  • Cost Advantages: They have a reasonable cost structure by being a middleman that produces parts for many different vehicles with high economies of scale.

While Dorman does have some competitive advantages, they are not quite substantial or widespread enough to warrant a wide moat rating. They are still vulnerable to new competition that comes up with lower cost structures or can come in with better tech.

Risks to the Moat

  • Competition: As previously mentioned, the automotive aftermarket is extremely competitive. New entrants and established players alike are aggressively trying to get a share of the pie. This might lead to lower pricing and hurt profits.
  • Technological Disruption: The rapid changes in automotive technology, especially the increasing adoption of EVs can make some of their parts obsolete and less valuable. Dorman would need to adapt to changing consumer demand to keep up.
  • Economic Downturn: Economic slowdowns and recessions will put huge pressure on demand, because consumers might put off repair and maintenance. This will drastically hurt sales and profitability.
  • Supply Chain Disruptions: Supply chain disruptions are a persistent threat. If the company is unable to manage the supply effectively, it could lead to increased costs and lower profits.
  • Tariffs and International Issues: The company has a small percentage of products purchased from outside the US, particularly China, with some parts in Mexico. The company is subjected to tariffs, geopolotical risks, regulations, and compliance issues, any of which could lead to a decrease in profitability.

Business Resilience

Despite some of these risks, Dorman’s business model has good resilience due to the following:

  • Established Brand: Their brand recognition provides a degree of customer loyalty and helps them maintain their position in the market.
  • Diverse Portfolio: They have a large portfolio of products that are spread across different segments and vehicle types, providing stability.
  • Focus on Unpopular Parts: By having a focus on providing hard to find parts, this allows them to generate sales that many companies don’t.
  • Strong Distribution Network: The company has a large distribution network which allows them to sell across many different geographies.

Understandability Rating: 2/5

Dorman Products’ business model is quite difficult to understand for the average investors. It is not your typical type of business. The company does not focus on building new parts for new cars, rather they focus on selling replacement parts for existing cars. This makes this business different from the norm and therefore takes some effort to fully understand. Also, the company’s financials are also a bit hard to understand as they require a lot of accounting knowledge.

Balance Sheet Health Rating: 4/5 Dorman’s balance sheet health is great and is quite stable. The company has a strong current ratio, and a good debt to equity ratio. The company also has a good amount of cash on hand to help fund for the coming years. They are a low leveraged company with lots of room to grow or sustain a downturn. This warrants a high balance sheet rating. Their financial health allows them flexibility to reinvest in the company, give returns back to shareholders, or face any new challenges.