Diversified Global Sourcing And Asset-Light Production Will Strengthen Resilience

Key Takeaways

• Supply chain diversification and asset-light manufacturing enhance operational flexibility and competitive advantage, potentially boosting margins and future earnings.
  
• Investment in innovation and strong macro trends sustain revenue growth, supported by a robust financial position enabling strategic growth initiatives.
  
• Exposure to tariffs and economic instability could strain margins and resources, impacting revenue and profitability amidst market pressures and declining consumer sentiment.

Catalysts

Supplies replacement and upgrade parts for the motor vehicle aftermarket industry in the United States and internationally.

• Dorman Products has significantly diversified its supply chain since 2018, reducing reliance on China to only 30-40% of sourcing, while expanding sourcing in the U.S. and globally. This supply chain resilience is expected to mitigate tariff impacts and enhance future net margins through cost savings and operational flexibility.
  
• The company's investment in innovation and new product development, particularly in nondiscretionary parts, is driving strong customer demand and sales, notably in the light-duty segment, which supports expectations of sustained revenue growth.
  
• Dorman’s asset-light manufacturing strategy and deep supplier relationships provide a competitive advantage, helping to maintain product availability and favorable pricing, thereby potentially boosting future earnings.
  
• Strong macro trends in the light-duty aftermarket, such as extended vehicle lifespans and increased vehicle miles traveled, are expected to continue driving demand for Dorman’s products, positively impacting revenue growth.
  
• Despite uncertainties, Dorman maintains a robust financial position with reduced debt and significant liquidity, enabling strategic growth initiatives and potential share buybacks, which are expected to contribute to earnings per share growth.

Dorman Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dorman Products's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.5% today to 12.0% in 3 years time.
• Analysts expect earnings to reach $276.8 million (and earnings per share of $8.95) by about May 2028, up from $214.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2028 earnings, up from 17.5x today. This future PE is greater than the current PE for the US Auto Components industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.09%, as per the Simply Wall St company report.

Dorman Products Future Earnings Per Share Growth

Risks

• Exposure to new tariffs, particularly the Section 232 auto tariffs, could lead to increased costs that may not be fully recoverable through price adjustments, potentially impacting net margins.
  
• Continued market pressures in the trucking and freight markets, along with the uncertainty introduced by tariffs, have already resulted in negative segment operating margins in the heavy-duty sector, which could adversely affect overall earnings.
  
• A decline in consumer sentiment and spending, especially in the UTV and ATV markets, could result in sales declines, impacting revenue growth for that segment.
  
• Increased inventory costs due to tariffs will require cash flow and liquidity to manage, potentially straining resources that could otherwise be used for strategic growth opportunities, influencing future earnings.
  
• The company's reliance on nondiscretionary parts during uncertain economic periods may provide some buffer, but continued economic instability could lead to weakened demand, affecting revenue and profitability.

Valuation

• The analysts have a consensus price target of $144.75 for Dorman Products based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $153.0, and the most bearish reporting a price target of just $130.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.3 billion, earnings will come to $276.8 million, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $122.99, the analyst price target of $144.75 is 15.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.