Why We're Not Concerned About Dorman Products, Inc.'s (NASDAQ:DORM) Share Price

Dorman Products, Inc.'s (NASDAQ:DORM) price-to-earnings (or "P/E") ratio of 21.8x might make it look like a sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Dorman Products has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Dorman Products

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dorman Products.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Dorman Products would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 6.3%. The solid recent performance means it was also able to grow EPS by 26% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 35% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 12% growth forecast for the broader market.

With this information, we can see why Dorman Products is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Dorman Products' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Dorman Products is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Dorman Products. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.