Dorman Products: Margin headwinds do not make for an attractive situation. (NASDAQ:DORM)
In September I Dorman products (Nasdaq: Dormitory) Still under pressure from M&A glut. Sales growth was solid thanks to the deal, but margins were under some pressure. take over.
All of this has made me a little cautious, and while the cut in annual guidance wasn’t unexpected, I’m glad to see that some debt deleveraging has alleviated most of the debt concerns, although the stock is considered fair value at best.
Replacement Part Information
Dorman Products supplies and supplies replacement parts to the automotive aftermarket industry, offering thousands of unique parts in hundreds of categories. Founded in the 1970s, the company has a long history and has achieved strong performance, providing solid returns for long-term investors.
that much The company has increased revenue generated from retail, heavy equipment and other market categories to $1.3 billion in 2021, a three-fold increase over the 2010s. A $345 million deal for Dayton Parts that year fueled growth, but organic growth also was solid due to the pandemic. In 2021, the company, with a revenue base of $1.36 billion, posted net income of $131 million, resulting in earnings per share of more than $4.
With further growth expected in 2022 (earnings are set to rise comfortably above $5 per share) and Dayton’s contribution throughout the year, both top and bottom lines are set to improve further. This momentum has pushed the stock to record highs around $120 in both 2021 and 2022.
Later in 2022, the company cut its full-year guidance slightly and announced a significant and somewhat expensive deal, paying $490 million to acquire SuperATV to add $211 million to its powersports parts sales. There was some congestion. The deal was executed at a significant premium in terms of sales multiples, with leverage of approximately 2.3x.
Coming down
After more expensive trading in the summer of 2022, the stock traded in a range of $75 to $100, and was trading at $78 in September. This comes after 2022 revenue of $1.73 billion topped original guidance, but adjusted earnings per share of $4.76 were up slightly from the previous year, missing the original forecast by a mile.
Net debt has further increased to $688 million, and lower profitability has reduced adjusted EBITDA to $215 million, which is concerning given the leverage ratio of just over 3x. The company said it expected to boost 2023 revenue from $1.95 billion to $2 billion, driven by SuperATV’s contribution, with adjusted earnings of up to $5.15 to $5.35 per share.
By September, the company announced first-half results showing a 15% increase in sales, but earnings were down year-over-year, with first-half earnings of just $1.57 per share. Fortunately, net debt has been reduced to $620 million. This is the amount needed given the suboptimal returns.
Trading at $78, the company’s market value has fallen to $2.4 billion, giving it an enterprise value of $3 billion. Continued margin pressure, resulting earnings pressure, and higher leverage ratios have made us cautious as we wonder whether 14-15x earnings multiples are cheap enough. This comes as the company identified risks to its full-year revenue guidance after poor first-half performance and knew it was too early to weigh in.
pent
Since September, Dorman’s stock has traded in a range of $60 to $80, and after falling to $60 in October, it is currently trading at $76 per share.
The decline coincided with the release of third quarter earnings on the last day of October. The stock fell despite an 18% increase in third-quarter revenue to $488 million, and operating margin improved three points to $64 million, or 13.2% of revenue. Net income was $40 million, or $1.28 per share, up 31 cents from the previous year. Net debt was reduced to $573 million thanks to retained earnings and good working capital management.
Despite the somewhat resilient results, the company lowered its outlook, as I had feared in September. Full-year revenue is now at the midpoint of $1.935 billion, down $40 million from the midpoint of previous guidance, and adjusted earnings per share guidance is down 80 cents to $4.35 to $4.55 per share, which is not unexpected.
Over the past month, the stock has risen from $60 to $76, a significant gain of 25% in a short period of time. This is mainly due to lower interest rates causing the overall market to rise. The multiple has risen to around 17 times earnings power, which seems reasonable as the worst leverage concerns appear to be a thing of the past despite low earnings power.
And now?
The cut in annual guidance didn’t surprise me, but the extent of the cut was significant and the move to the $60 level created a great buying opportunity in retrospect.
Given all this, a drop to $60 looks very interesting, as operating margins are down slightly (with room for recovery) and leverage issues are quickly becoming a thing of the past. It was comforting to note that the share price increase was significant in the absence of any specific news about the company, and expectations for me here were so high that I could watch cautiously from the sidelines.