Dorman Products' Guidance Disappoints Investors

By Dan

Image: Dorman Products.

The auto industry has enjoyed strong conditions lately, and more vehicles on the road mean more potential business for the suppliers that make and distribute aftermarket parts and components to owners. Dorman Products serves a wide variety of companies affiliated with the auto industry in providing auto parts to retailers and repair shop professionals. Unlike General Parts and other auto-parts suppliers, though, Dorman has elected to specialize in supplying components that are more difficult to find, and coming into Wednesday's third-quarter financial report, investors were hoping that the company would be able to sustain modest growth rates. Dorman's results met those expectations, but the stock nevertheless fell in response. Let's look more closely at how Dorman Products did and why investors responded negatively.

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Dorman drives higher Dorman Products' third-quarter results reflected the slow growth that investors have started to expect from the company. Revenue rose 7% to a record level of $210.9 million, which almost exactly matched the consensus forecast among investors. Net income gained 6% to $26.1 million, and that produced earnings of $0.73 per share, hitting analysts' estimates and representing growth of a nickel per share from the previous year's third quarter.

Looking more closely at Dorman's results, the company actually fared better than the top-line numbers would suggest when you consider that Dorman's customers stocked up on many of its products last year in advance of its enterprise resource planning system conversion, which added about $10 million to last year's revenue figure that arguably would have occurred later otherwise. Excluding that factor, adjusted sales climbed 12%, and Dorman pointed to a combination of new products and more typical purchasing behavior from one of its most important customers in driving sales higher.

Dorman continues to face some challenges on the expense front. Gross profit margins declined slightly from year-earlier levels, and a 6% rise in selling, general, and administrative expenses came largely from additional company investments in developing new products as well as incremental costs stemming from its sales growth. Nevertheless, Dorman's overall results represented a nice pick-up from the slower growth pace that the company had seen earlier in 2015.

CEO Matt Barton was generally pleased with Dorman's results during the quarter, offering commentary on what helped the company. In addition to the factors mentioned above, Barton cited "an improvement in sell-through growth rates compared t the second quarter, which we expect to continue during the fourth quarter."

Can Dorman do better?Looking ahead to 2016, Dorman will continue to face a tough environment, as General Parts and other rivals in the auto-parts industry ramp up their own efforts to claim more of the market. In offering guidance for the coming year, Barton said that "despite increased competitive pressures, we expect to deliver revenue and profit growth in the mid-single digit range," and he "remains bullish on the long-term outlook for the business." The problem is that investors were hoping to see growth return to double-digit percentage levels.

In particular, Dorman sees growth opportunities in both the automotive aftermarket and in other related corners of the auto-parts industry. Dorman's competitive advantage over General Parts and its other rivals comes from its innovative spirit, and the drive to create new products is an essential aspect of the company's strategic vision toward playing a larger role in the auto-parts industry in the long run.

In conjunction with its earnings results, Dorman also announced that it would boost the size of its stock repurchase program by half, with the new authorization extending to $150 million. The pace of Dorman's buybacks has been slow, but the pace picked up somewhat during the third quarter, with the company spending $4.4 million to buy 89,100 shares at an average price of $49.55 per share.

Because of the less aggressive guidance that Dorman gave for 2016, the stock price fell substantially following the announcement, wiping out gains from the summer months. To satisfy investors completely, Dorman will have to find ways to hit the accelerator and capture the full opportunity that the auto-parts industry is offering right now.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Dorman Products. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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