Diving Into Douglas Dynamics (NYSE:PLOW)

The best revenge is to be unlike him who performed the injury.”― Marcus Aurelius, Meditations.

Today, we take a deeper look at a manufacturer that dominates its market and is seeing somewhat of a turnaround. The stock has a healthy dividend yield and has seen some recent insider buying as well. An analysis follows below.

Company Overview:

Douglas Dynamics, Inc. (NYSE:PLOW) is a Milwaukee-based manufacturer and upfitter of work truck attachments and solutions, primarily focused on snow removal and ice control equipment. The company’s six manufacturing locations are supported by 15 installment and distribution centers located in North America, supplemented by distribution relationships in Northern Europe and Asia.

With roots dating back to 1946, Douglas Dynamics started manufacturing snowplows in 1952 as Western Products, changing to its current moniker in 1977. It was acquired by Armco in 1991, purchased by private equity in 2004, and went public in 2010, raising net proceeds of $63.9 million at $11.25 per share. Its stock trades just over $31.00 a share, translating to an approximate market cap of $700 million.

Operating Segments

The company views its operations through two segments: Work Truck Attachments (WTA); and Work Truck Solutions (WTS).

WTA offers a broad array of snowplows, sand and salt spreaders – for light duty trucks – as well as parts and accessories. Sold under brands Fisher, Western, and SnowEx, management believes it is the largest provider of such products in North America, boasting 3,100 points of sale. Snow removal and ice control equipment represent ~85% of WTA’s top line, with parts and accessories providing the balance. Overall, the unit accounted for FY22 Adj. EBITDA of $78.2 million on net sales of $382.3 million, accounting for 62% of Douglas’ total revenue.

WTS provides manufactured municipal snow and ice control products, as well as upfitting of attachments and storage solutions under its Henderson brand. Through its Dejana banner, Douglas also offers upfitting of truck storage and utility equipment products. Whereas WTA focuses on light trucks, WTS upfits Class 3-8 and other commercial work vehicles. Approximately half of this segment’s net sales is derived from dealer customers, with the balance a function of fleet sales to government entities (~40%), as well as parts and accessories (~10%). With ~2,800 customers, WTS generated FY22 Adj. EBITDA of $8.6 million on net sales of $233.8 million, accounting for the balance (38%) of the company’s top line.

Approach

Demand for snow and ice control equipment is typically a function of snowfall, which can be highly variable year-over-year. That said, it is fairly consistent over the long haul, with aggregate snowfall levels over any rolling ten-year period in the 26 snow-belt states ranging from 2,782 to 3,345 inches since 1984. To offset the seasonality of its business, Douglas offers pricing, payment, and freight incentives in 2Q and 3Q to build backlog and provide visibility.

Its capital allocation strategy involves payment of a quarterly dividend – which it has increased 15 times in the past 13 years – maintenance of net leverage in a range of 1.5 to 3.0, and a share repurchase program.

Performance Recap

Despite already controlling significant market share, Douglas was able to increase its non-GAAP earnings 67% between FY17 and FY19 to $2.42 a share on a net sales increase of 20% to $571.1 million – a function of its ability to push through higher prices as snowfall returned to normal levels after a weak FY17. The company’s stock price more than reflected this growth, rising 72% to $55.00 a share over the two years ending YE19. This performance also capped a strong seven-year run, during which it grew its top line at a 22.2% CAGR (FY12 to FY19) on the back of three acquisitions (TrynEx, maker of SnowEx – 2013; Henderson – 2014; and Dejana – 2016).

Douglas was then significantly impacted by the pandemic in FY20, with supply chain issues precipitating reduced class 4-6 chassis production, and the closure of municipal facilities, meaning fewer orders from government entities. If this existential crisis wasn’t enough, snowfall during the six-month snow season ending March 31, 2020, was 23% lower than the 40-year average. In total, non-GAAP earnings cratered 51% to $1.18 a share on a 16% decline in net sales to $480.2 million.

Ironically, sales have rebounded despite snowfall remaining tepid, with the 2021 season (ending March 31, 2021) (down 9%) and the 2022 season (down 13%) below the annual average since 1980. That said, both years were improvements over 2020, which boosted demand, allowing the company to more readily pass through price increases. As a result, FY21 sales improved 13% to $541.4 million, with FY22 eclipsing FY19 at a record $616.1 million. However, the bottom line did not return to pre-pandemic levels as material, labor, and price inflation impacted margins. Gross margin, which was 29.6% and 29.5% in FY18 and FY19 (respectively), fell to 26.7%, 26.2%, and 24.6% in FY20-FY22 (respectively). Owing to these COGS headwinds, Douglas earned $1.67 a share (non-GAAP) in FY21 and $1.84 a share (non-GAAP) in FY22.

Shares of PLOW have more or less reflected these developments, rebounding from a pandemic-selloff low of $24.12 in March 2020 to $51.44 in March 2021, anticipating a return to normal that failed to materialize. As such, its thinly traded stock nearly roundtripped, trading as low as $25.63 a share in May 2023 after a disappointing Q1 2023 earnings report, the function of another weak snowfall season (14% below the ten-year average), punctuated by multi-decade lows (down as much as 90% from normal) in its core I-95 corridor markets. Its stock has hovered around $30 ever since.

Q2 2023 Earnings & Outlook

Strangely, Douglas’ performance in 1H23 was almost identical near the top of the income statement versus the prior year period, with Douglas generating gross profit of $72.6 million (25.1%) on net sales of $289.8 million as compared to $72.3 million (24.9%) on net sales of $290.2 million in 1H22.

That result was actually due to Q2 2023 representing a marked improvement over Q2 2022 (and 1Q23), with the company posting earnings of $1.11 per share (non-GAAP) and Adj. EBITDA of $43.3 million on net sales of $207.3 million versus $0.85 per share (non-GAAP) and Adj. EBITDA of $34.1 million on net sales of $187.6 million in 2Q22 – representing increases of 35%, 27%, and 11%, respectively – on July 31, 2023. Gross profit margin improved from 27.3% in Q2 2022 to 29.6% in Q2 2023. The bottom line beat Street consensus by $0.22 a share while the top line was $13.6 million better.

The strong showing was led by WTA, which generated Adj. EBITDA of $42.3 million (30.0% margin) on net sales of $141.2 million. WTS continued to be dragged down by supply chain constraints in class 3-6 work trucks, producing Adj. EBITDA of $1.0 million (1.5% margin) on net sales of $66.0 million.

Despite the continued bottlenecks, management was cautiously optimistic, citing a near-record backlog, including 12 to 18 months in its WTS segment. Douglas reiterated its FY23 outlook of $1.55 to $2.00 a share (non-GAAP), Adj. EBITDA of $85 million to $100 million, and net sales of $620 million to $650 million. Shares of PLOW did not budge on this news, remaining near $30.

Balance Sheet & Analyst Commentary:

Despite its challenges, the company has been a consistent source of dividend income, currently paying a quarterly distribution of $0.295 a share for a current yield of 3.9%. On June 30, 2023, it held cash of only $3.4 million, but that low figure was a function of seasonality and working capital cycling, with access to an additional $75.5 million of liquidity through a revolving credit facility. That said, its debt totaled $263.6 million at the end of Q2 2023, for net leverage of 3.0, the high end of its target range. As noted previously, the board approved a $50 million share repurchase program in February 2022, although it has not acquired any shares in FY23, leaving $44.0 million remaining on its authorization.

With a sub-$1 billion valuation, the Street following is relatively sparse but upbeat, with DA Davidson ($40 price target) and Robert Baird ($46) both constructive on Douglas. On average, they expect the company to earn $1.73 a share on net sales of $632.4 million, followed by $2.42 a share (equaling its FY19 peak) on net sales of $676.0 million in FY24.

CEO & President Robert McCormick is also bullish, based on his September 6th purchase of 10,000 shares at an average price of $30.71.

Verdict:

Although not a party to any collective bargaining agreement, the continuing UAW strike could create another supply chain kerfuffle for Douglas Dynamics, Inc. That notwithstanding, if the company achieves its FY23 outlook, it will be due to price increases and COGS relief, as volumes are projected to be lower versus FY22.

Its stock currently trades at just over 18.5 times FY23E EPS, an EV/FY23E Adj. EBITDA of under 11, and a price-to-FY23 sales of 1.1, all of which are adequate valuations for a snowplow and salt spreader manufacturer with substantial market share. The company is forecasted to earn significantly more in FY24, but that forecast is not particularly stable given the unknowns regarding snowfall year-to-year.

Management is sound and the dividend – its top priority – is attractive and secure, but betting on meaningful growth from Douglas is challenging. Despite its acquisition driven growth spurt in the prior decade, Douglas is an erratically cyclical business, deserving of a discounted multiple. Although its stock could surprise to the upside, current price levels don’t warrant investment in Douglas Dynamics, Inc.

Revenge, the sweetest morsel to the mouth that ever was cooked in hell.”― Walter Scott.