North American Aging Vehicles Will Sustain Aftermarket Demand

Key Takeaways

• Sustained demand from an aging vehicle fleet and delayed new car purchases is driving stable, recurring revenue and margin expansion.
  
• Launching high-margin proprietary products and executing cost-saving initiatives strengthens profitability, while targeted acquisitions enhance growth opportunities.
  
• Dorman faces long-term margin and growth pressures from persistent tariff risks, EV adoption, rising SKU complexity, customer concentration, and weak demand in key market segments.

Catalysts

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

• The increasing average age of vehicles in North America (now 12.8 years) is supporting sustained, recurring demand for replacement parts, fueling year-over-year volume growth, especially in the light-duty business segment-driving top-line revenue and providing long-term visibility into the company's future revenue streams.
  
• Growing consumer preference to hold onto vehicles for longer periods, alongside a persistent trend of delayed new car purchases, is expanding Dorman's addressable aftermarket-bolstering recurring sales potential, which is expected to favorably impact both revenues and underlying earnings stability.
  
• Dorman's continuous launch of new, high-margin, proprietary products-especially those "new to the aftermarket" or addressing OE part flaws-further expands gross and operating margins, with recent quarters evidencing margin expansion primarily attributed to strong adoption of these innovations.
  
• Ongoing supply chain diversification, automation, and productivity initiatives are enabling cost savings across the enterprise, improving supply resilience, mitigating tariff headwinds, and underpinning steady operating margin gains-supporting enhanced net margin and earnings growth.
  
• The company's strong balance sheet and capital allocation flexibility, paired with a robust M&A approach targeting niche product categories, positions Dorman to benefit from further inorganic growth in a consolidating industry-potentially accelerating future revenue growth and supporting EPS expansion.

Dorman Products Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dorman Products's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.8% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $237.0 million (and earnings per share of $7.73) by about September 2028, up from $226.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, up from 22.1x today. This future PE is greater than the current PE for the US Auto Components industry at 17.7x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

Dorman Products Future Earnings Per Share Growth

Risks

• Dorman's business is experiencing significant near-term benefit from price increases to offset tariffs, but the underlying risk remains that tariff and geopolitical uncertainty could persist or intensify, resulting in unpredictable input costs that may be difficult to fully pass through to customers long-term, potentially compressing net margins and impacting future earnings.
  
• Heavy dependence on continued strength in the aging internal combustion engine (ICE) vehicle fleet, while management references robust pipeline in new "complex electronics," Dorman's core aftermarket business remains structurally at risk from accelerating electric vehicle (EV) adoption, which threatens to shrink long-term organic revenue growth as EVs require fewer aftermarket parts.
  
• The company's light duty margin improvements are currently driven by automation, new product launches, and supply chain diversification, but the expanding complexity of SKUs and emphasis on proprietary electronics may lead to rising R&D and inventory costs, increasing the risk of margin erosion and potential write-downs that could negatively affect profitability over time.
  
• Dorman's continued reliance on large distributor and retailer customers for the majority of its sales creates customer concentration risk, exposing it to future pricing pressure or margin squeeze if these partners consolidate or leverage increased bargaining power-potentially impacting revenue stability and net income.
  
• While recent growth is fueled in part by price increases and new business wins, soft demand in heavy-duty and specialty vehicle segments as well as ongoing weak consumer sentiment signal potential long-term vulnerability if broader economic or industry trends do not materially rebound, creating a risk of stagnating or declining net sales and operating income.

Valuation

• The analysts have a consensus price target of $164.167 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 $182.0, and the most bearish reporting a price target of just $135.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $237.0 million, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 8.0%.
• Given the current share price of $163.21, the analyst price target of $164.17 is 0.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.