Based on the closing price of the stock on 28 January 2013 at $13.07, Douglas Dynamics, Inc. (PLOW) is currently trading within 5% of its 52 week low of $12.37 and sports an attractive dividend yield of 6.4%. PLOW, the leading North American snowplow manufacturer for light trucks, has attracted the attention of John Burbank, the founder of Passport Capital, who has achieved an impressive annualized return of 23% since 2000. Burbank initiated a position of 12,031 shares in PLOW in the third quarter of 2012. Above-average levels or signs of economic recovery could kickstart another elevated multi-year replacement cycle. PLOW boosts of a highly visible and recurring revenue stream over a 7-8 year replacement cycle for actively-used snowplows, as snow and ice control management is a non-discretionary service necessary to ensure public safety and mobility in populated areas that receive snowfall. PLOW has delivered 4 consecutive years of profitability and positive free cash flow since fiscal 2008, growing its revenue and net income by a decent three year CAGR of 5.1% and 18.4% respectively.
Headquartered in Milwaukee, Wisconsin, PLOW designs, manufactures and sells snow and ice control equipment for light trucks, which is comprised of snowplows and sand and salt spreaders, and related parts and accessories. PLOW sells its products under the WESTERN, FISHER and BLIZZARD brands through a distributor network, primarily consisting of truck equipment distributors located throughout the Midwest, East and Northeast regions of the United States and all provinces of Canada.
PLOW is the leading North American snowplow manufacturer for light trucks. It designs, manufactures and sells of snow and ice control equipment for light trucks such as snowplows, sand and salt spreaders and related parts and accessories. Snowplows and spreaders accounted for 85% of PLOW's fiscal 2011 sales and the remaining 15% of sales was attributed to parts & accessories. PLOW also has an extensive and stable distribution network, with over 720 direct distributors spread across North America. According to management estimates provided by PLOW at the Oppenheimer & Co. 7th Annual Industrials Conference, PLOW has an estimated 50-60% share of the distributor network in North America, which provides it with unparalleled scale and channel penetration. Distributors function both as sales and support agents and industry partners providing real-time end-user information on retail inventory levels and changing consumer preferences.
PLOW benefits from attractive industry dynamics, as it produces mission critical products for non-discretionary services. Snow and ice control management is a non-discretionary service necessary to ensure public safety and mobility in populated areas that receive snowfall, end-users cannot extend the useful life of snow and ice control equipment indefinitely and must replace equipment that has become too worn or unsafe, regardless of economic conditions. As sales of snowplows and sand and salt spreaders are primarily driven by the need to replace worn existing equipment, PLOW's installed base of over 500,000 snowplows and sand and salt spreaders in service provides it with a high degree of predictable sales over any extended period of time. On average, actively-used snowplows are typically replaced every 7 to 8 years.
PLOW is a market leader in operating efficiency. An ongoing focus on lean initiatives enables it to adjust production levels easily to meet fluctuating demand, while controlling costs in slower periods. This operational efficiency is supplemented by PLOW's highly variable cost structure, driven in part by a non‐union workforce augmented by a flexible layer of temporary workers which comprises approximately 10-15% of its total workforce. These manufacturing efficiencies enable it to respond rapidly to urgent customer demand during times of sudden and unpredictable snowfalls and provide exceptional customer service.
John Burbank, founder of Passport Capital LLC, an Francisco-based, global investment firm which manages approximately $3.7 billion in assets, initiated a position of 12,031 shares in PLOW in the third quarter of 2012. Besides making his name for predicting the subprime crisis, Burbank has achieved an impressive annualized return of 23% since 2000, according to Insider Monkey.
Another below average year of snowfall, coupled with weak economic conditions, have resulted in the deferral of new equipment purchases. However, given the non-discretionary nature of snow and ice control management and the 7 to 8 years replacement cycle for actively-used snowplows, an elevated multi-year replacement cycle could resume if snowfall is at above-average levels or the economy shows signs of recovery.
Valuation and Financial Analysis
PLOW currently trades at a trailing twelve months P/E of 21.8 and a trailing twelve months EV/EBITDA of 11.5. PLOW has achieved a trailing twelve months ROE of 8.1%. PLOW has delivered 4 consecutive years of profitability and positive free cash flow since fiscal 2008. Management has grown PLOW's revenue and net income by a decent three year CAGR of 5.1% and 18.4% respectively. PLOW is highly geared with a debt-to-equity ratio of 85%. PLOW started paying quarterly dividends in 2010 and currently sports a dividend yield of 6.4%.
PLOW's sales depend primarily on the level, timing and location of snowfall. A low level or lack of snowfall in any given year in any of the snow-belt regions in North America, primarily the Midwest, East and Northeast regions of the United States and Canada, will likely cause a decrease in the sales of its products. In addition, PLOW experiences seasonality in both its sales and working capital needs, as distributors typically purchase products during the annual snow season running from October 1 through March 31, which corresponds with its second and third quarter financial reporting periods.
Weakened economic conditions may cause end-users to delay purchases of replacement snow and ice control equipment and instead repair their existing equipment. While PLOW's sales of parts and accessories yield slightly higher gross margins than its snow and ice control equipment, they yield significantly lower revenue than equipment sales.
Steel is a significant raw material used to manufacture PLOW's products. Steel prices have been volatile in recent years, and PLOW may not be able to mitigate increased costs as a result of high steel prices. Its steel purchases were approximately 15%, 13% and 18% of its 2011, 2010 and 2009 revenue, respectively, according to its 2011 10-K.
As of December 31, 2011, PLOW's pension plans were underfunded by approximately $14.2 million. If plan assets continue to perform below expectations due to volatile capital markets, future pension expense and funding obligations will increase.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.