Dorman Products Finishes 2016 Strong

By Dan Caplinger Markets Fool.com

Dorman Products (NASDAQ: DORM) has built a name for itself by supplying high-quality automotive parts to a hungry aftermarket. Dorman's expertise and innovation has allowed it to make original equipment manufacturer parts efficiently, and buyers enjoy the benefit of lower costs than what they'd pay from traditional OEM sources. Coming into Wednesday's fourth-quarter financial report, Dorman investors had high hopes for continuing growth from the auto-parts supplier, and Dorman was able to deliver on that front with strong gains in revenue and earnings.

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Let's look more closely at Dorman Products to see how it did and what's ahead for the company in 2017.

Image source: Dorman Products.

Dorman hits the accelerator

Dorman Products' fourth-quarter results marked a key rebound from a sluggish third quarter. Sales jumped 12% to $229.1 million, which was considerably higher than the 9.5% growth rate that most investors were looking to see. Net income was up by nearly a third to $28.7 million, and that produced earnings of $0.83 per share. The figure compared favorably with the consensus forecast of $0.76 per share.

Looking more closely at the numbers, there are a couple of things that Dorman noted that investors should keep in mind. First, the fiscal fourth quarter in 2016 contained 14 weeks rather than 13, and that obviously had an upward impact on Dorman's results. Adjusting for the extra week, Dorman said that sales were up about 7%, and it suggested that earnings-per-share growth would have come in closer to 24% in a regular 13-week quarter.

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In addition, Dorman pointed to the reversal of some adverse trends that held it back during the third quarter. In particular, Dorman said that unfavorable stocking order comparisons from last quarter produced benefits in the fourth quarter. Moreover, an extra shipping week also helped boost year-over-year numbers.

Dorman has worked hard to boost its margin figures, and those efforts kept paying off during the quarter. Gross margin expansion came from a more favorable sales mix, stemming in part from Dorman's decision to exit some low-margin product lines over the past year. In addition, Dorman reduced inventory levels and focused on higher-quality products in its inventory. Lower overhead expenses also played a key role in improving operating margin, and boosts of more than two percentage points in gross margin and almost four percentage points in operating margin showed the rewards of the work that Dorman has done.

CEO Matt Barton was pleased with Dorman's performance. "Our core mission continues to be identifying failure-prone passenger car, light truck, and heavy duty truck parts that are only available from dealerships," Barton said, "and making a high quality alternative available to our customers and end users." The CEO pointed to more than 4,200 new parts that Dorman launched during 2016, including more than 1,250 parts that carried its "formerly dealer only" designation.

Can Dorman keep speeding up?

Dorman believes that the auto parts industry has plenty of room for further expansion. In Barton's words, "We continue to invest in our new product capabilities, allowing us to deliver growth well in excess of industry growth levels."

Dorman's guidance for 2017 showed how the auto-parts supplier expects the industry to shake out over the coming year. The company expects mid- to high-single digit percentage gains in organic revenue, and a similar pace of growth should boost Dorman's bottom line as well.

From a longer-term perspective, Dorman Products has seen its prospects improve as conditions in the auto industry remain strong. An anticipated pick-up in activity levels in the industrial economy could help drive greater demand for high-quality parts, and that could keep the company moving forward in the coming year. Fundamentally, the actions that Dorman has taken to boost growth have been successful, and investors hope that the parts supplier can keep finding new ways to squeeze even more profit from this lucrative business.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Dorman Products. The Motley Fool has a disclosure policy.