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Dorman Disappoints as Growth Rates Slow

In recent years, extremely good conditions in the auto industry have helped create strong demand for high-quality auto parts. That's been good news for Dorman Products (NASDAQ: DORM), which already offers a wide array of valuable products and has worked even harder to come up with innovative new parts to serve the changing needs of its customers.

Coming into Friday's third-quarter financial report, investors expected the company to produce the same solid rate of growth that it has seen recently. Dorman wasn't able to match its previous performance, however, and that even though the auto parts company still managed to produce some growth, the report raised questions about what's coming down the road. Let's take a closer look at how Dorman Products did and what's next for the company.

Image source: Dorman Products.

Dorman puts on the brakes

Third-quarter results didn't live up to the high expectations that many had for the auto parts specialist. Revenue was up 5.6% to $224.6 million, but that was a far cry from the 10% growth rate that those following the stock had wanted to see. Net income inched higher by 1% to $27 million, but the $0.80 per share in earnings that Dorman posted fell short of the consensus forecast for $0.87 per share.

Dorman said that the sluggish performance came mostly from an initiative to reduce the amount of inventory that one of its major customers held. The parts maker said that those efforts were largely successful, but the negative impact to earnings amounted to about three percentage points.

The company also continued to seek to come up with new and innovative products in order to keep ahead of its competition. It launched more than 950 products with unique stock-keeping units, and although the SKU count increase decelerated from more than 1,000 last quarter, it nevertheless produced concrete improvement in key areas. For instance, Dorman said that its heavy-duty solutions business has seen gains of more than a third so far this year, while its complex electronics lineup has grown in size by about a fifth.

Some of the moves that Dorman has made to curtail costs weren't as successful this quarter as they've been in the past. Gross margin improved by just a tenth of a percentage point, and a substantial increase in overhead expenses resulted from inflation in employee wages and benefits as well as the investments that Dorman has made to expand its product lineup.

CEO Matt Barton was happy with how Dorman did. "We are pleased with our performance this quarter," he said, "[as] our investment in developing new products continues to pay off, positioning us well for the future." Barton also pointed to the company's new chassis product offering, which has contributed a full percentage point of revenue growth for Dorman so far in 2017.

Can Dorman push growth into overdrive?

Dorman was also optimistic about its future. The company kept its outlook for 2017 largely unchanged, with anticipated revenue gains of about 6% and high single-digit percentage growth in earnings per share, even though the fourth quarter will have one fewer week than the corresponding period in 2016 had.

Dorman also kept taking advantage of its weak stock price to repurchase shares. It bought back almost 343,000 shares for $24 million, paying just under $70 per share on average. That accelerated the pace of buybacks from earlier in the year, reflecting the steady decline that the share price has suffered over the past six months.

Investors in Dorman Products weren't happy about the fact that it wasn't able to grow as quickly as they had wanted. The stock was down 4% at midday following the morning announcement. Yet if Dorman can stay on track with good innovations in the auto parts industry, then it should remain on pace to produce the fundamental growth that should eventually pay off for long-term shareholders.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Dorman Products. The Motley Fool has a disclosure policy.