The rising average age of vehicles in the U.S. has increased demand for replacement parts, benefiting Dorman Products (DORM), a key player in the automotive aftermarket. 

Dorman provides replacement and upgrade parts for vehicles in the critical 8 to 13-year-old range, offering a more affordable option compared to original manufacturers. 

The company is positioned for future growth, especially with the increasing complexity of vehicles and its focus on higher-margin products. 

While recent acquisitions and short-term challenges have affected margins, Dorman is addressing inefficiencies, positioning itself for long-term gains.

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The average age of vehicles on U.S. roads is rising, and it’s creating a unique opportunity in the automotive aftermarket industry.

According to S&P Global, the average vehicle age hit a record 12.6 years, marking a steady increase over the past six years.

Supply chain constraints have slowed the production of new vehicles, while inflation and higher interest rates have made consumers more likely to hold on to their cars rather than purchase new ones.

As vehicles age, they naturally require more maintenance and repairs, which means one thing: The demand for replacement parts is booming.

For Dorman Products (DORM), this is great news.

The company provides replacement and upgrade parts for cars, trucks, and specialty vehicles, and its primary customer base includes vehicles that are in that crucial 8 to 13-year-old range.

Dorman has been around for over 50 years, making it a seasoned player in the vehicle aftermarket.

Its offerings cover engine products, axles, undercar components, connectors, and much more.

The company built a reputation for being a reliable supplier in a sector where vehicle owners turn to third-party providers for affordable repair options rather than going straight to original manufacturers.

This approach helps consumers save money, with the high rates and inflation, it becomes an even more attractive option.

Additionally, the increasing complexity of vehicles, driven by trends like electric and autonomous technology, creates demand for more advanced, higher-margin products, an area where Dorman is well-positioned.

Furthermore, with high interest rates pushing consumers to repair their vehicles rather than buy new ones, the company stands to benefit from growing demand in the light-duty segment.

Despite its strong business model, Dorman’s stock appears undervalued due to short-term market concerns over recent acquisitions, trading around 15.4x Uniform P/E.

The company bought SuperATV in 2022 and Dayton Parts in 2021, gaining exposure to heavy-duty and specialized transport vehicles, both of which are higher-margin, higher-growth areas.

But integrating these acquisitions hasn’t been easy. Supply chain constraints and rising wages have eaten into margins, and Dorman has a track record of not always making the smoothest acquisitions.

For example, in 2019, margins declined due to a customer mix shift and the acquisition of lower-margin businesses.

But starting in early 2023, the company began addressing these inefficiencies, cutting excess workforce, and focusing on improving margins.

This year is the first full year of ownership for Dorman’s recent acquisitions, and we’re likely to see the impact of these changes over the next few quarters.

While short-term issues like trucking sector weakness and inflation have pressured margins, the company’s focus on higher-margin products and increased demand for advanced vehicle solutions should drive future growth.

With revenue and profits already on the rise, and margins expected to improve, Dorman could be a solid opportunity.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research