With a price-to-earnings (or "P/E") ratio of 20.2x Dorman Products, Inc. (NASDAQ:DORM) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 10x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Dorman Products certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Dorman Products

Want the full picture on analyst estimates for the company? Then our free report on Dorman Products will help you uncover what's on the horizon.

How Is Dorman Products' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Dorman Products' is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 95% last year. Pleasingly, EPS has also lifted 46% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 18% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14%, which is noticeably less attractive.

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

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

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.

Plus, you should also learn about this 1 warning sign we've spotted with Dorman Products.

You might be able to find a better investment than Dorman Products. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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