Douglas Dynamics: A Welcome Snow Job

by: Gerry Callihan


Accelerating Sales.

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I live in Wisconsin and I hate snow. I didn't even like the stuff when I was a kid. Snow is my enemy, so what better way to fight it than to invest in a company that is dedicated to the removal of this white scourge. I've found one.

Douglas Dynamics (NYSE:PLOW) is headquartered in Milwaukee. The company has been around for as long as I have, some 65 years. Douglas manufactures snowplows, sanding and salting equipment, sprayers, spreaders and other equipment for turf maintenance, and equipment-mounted industrial brooms. The company's family of brands include Fisher, Western, SnowEx, SweepEx, TurfEx and Henderson. Whether it's a sander on the truck of a contractor you see scurrying around town after a snowstorm, or a plow on one of those behemoths carving a path down the interstate, there's a good chance Douglas Dynamics built the equipment. I realize this isn't a business that will get the vein in your temple pulsating, but please bear with me. While the business PLOW engages in might be mundane, the numbers the company has been putting up are far from it.

Total sales for PLOW in fiscal 2014 were $300 million, an increase of 56% over the previous year. Sales on 2015 are expected to come in between $385 to $420 million. Part of this increase in 2015 sales is the result of PLOW's most recent acquisition, namely Henderson. If you're still awake in a few minutes, I'd like to tell you more about this newest addition to the PLOW family. 2015 was a busy year for PLOW - it was named the second fastest growing company in Wisconsin. This makes 2 years in a row PLOW has made the list, and 3 years total the manufacturer has received the honor since going public 6 short years ago. Also, in November 2015, PLOW received the Outstanding Corporate Growth Award. Only two Wisconsin companies a year receive the prize.

In their latest quarterly report, PLOW announced record sales of $121 million. Earnings for the quarter also set a record, coming in at $15.5 million or $0.68 a share. This is a 44% increase over earnings in the third quarter of last year. Based on the first nine months of the year, and using reasonable assumptions for the remaining quarter, Douglas Dynamics is estimating earnings of $1.70 to $2.05 a share. Just for fun, let's say the company makes $1.90 a share for the year. At $20 a share, we're looking at a PE of around 11. Even if its earnings growth rate should slow 20%, PLOW would still present a buying opportunity at current prices. I can hear the crackle of your brain activity from here. "PLOW is a proxy for the weather. Winter is coming, buy some stock. Wait, the forecasts call for a really bad winter, buy more stock. Buy in October, sell in February." That might have been true a few years ago, but that might not be the correct strategy anymore. I state my case below.

Douglas Dynamics has grown through acquisitions. In 1984 Douglas acquired Fisher Engineering, 2005 saw PLOW pick up Blizzard Inc., and TrynEx International was purchased in 2013. These subsidiaries, with the exception of TrynEx, which has some offerings not related to winter, are knee deep in the snowbank. That leaves us with Henderson, which was brought into the fold in 2014.

At first glance, Henderson appears to be another enterprise subject to the vagaries of the weather. That isn't entirely accurate. Henderson is an outfit headquartered in Manchester, Iowa that manufactures turnkey solutions for heavy-duty trucks. This is the big boy segment of the snow and ice control market. Henderson deals directly with state DOTs, counties and municipalities. This is a completely different customer base and sales cycle that PLOW hasn't enjoyed in years past. These agencies have budgets and pre-planned purchases to make. In short, winter doesn't have much to do with it. The revenues here are not only more visible; they are more predictable. I'm sure there will always be a seasonal swing to the share price of PLOW, but with Henderson in the lineup, I believe an investor in Douglas Dynamics can be just that, an investor; and not a gunslinger with an eye on the Weather Channel and a finger on the trade trigger.

And now for a few more numbers. For the trailing twelve months ending September, 30, 2014, Henderson recorded net sales of $76 million. Henderson has also registered sales growth for 11 consecutive years. PLOW purchased Henderson on the last day of 2014 for $95 million. As I mentioned earlier in my ramblings, PLOW notched record sales of $121 million in the third quarter. Nearly $27 million of these sales were attributable to Henderson. Management is confident that Henderson will be accretive to earnings in the coming fiscal year.

Here's a few more things to consider. $1000 invested in PLOW three years ago, with the steady drip, drip, drip of dividends, has grown to nearly $1600. Speaking of dividends, the company started paying them right after they went public and has increased them annually. The payout ratio on the dividend is under 50%.

In my humble opinion, and remember what you're paying for it, Douglas Dynamics is a company to own in July as well as January.

Do your homework and let me know what you think.

Disclosure: I am/we are long PLOW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.