Diving Into Douglas Dynamics (NYSE:PLOW)

The most effective revenge is to be not like him who carried out the damage.”― Marcus Aurelius, Meditations.

At present, we take a deeper take a look at a producer that dominates its market and is seeing considerably of a turnaround. The inventory has a wholesome dividend yield and has seen some latest insider shopping for as effectively. An evaluation follows under.

Firm Overview:

Douglas Dynamics, Inc. (NYSE:PLOW) is a Milwaukee-based producer and upfitter of labor truck attachments and options, primarily centered on snow elimination and ice management tools. The corporate’s six manufacturing places are supported by 15 installment and distribution facilities positioned in North America, supplemented by distribution relationships in Northern Europe and Asia.

With roots courting again to 1946, Douglas Dynamics began manufacturing snowplows in 1952 as Western Merchandise, altering to its present moniker in 1977. It was acquired by Armco in 1991, bought by non-public fairness in 2004, and went public in 2010, elevating internet proceeds of $63.9 million at $11.25 per share. Its inventory trades simply over $31.00 a share, translating to an approximate market cap of $700 million.

Working Segments

The corporate views its operations by two segments: Work Truck Attachments (WTA); and Work Truck Options (WTS).

WTA gives a broad array of snowplows, sand and salt spreaders – for gentle responsibility vehicles – in addition to elements and equipment. Bought beneath manufacturers Fisher, Western, and SnowEx, administration believes it’s the largest supplier of such merchandise in North America, boasting 3,100 factors of sale. Snow elimination and ice management tools signify ~85% of WTA’s high line, with elements and equipment offering the steadiness. Total, the unit accounted for FY22 Adj. EBITDA of $78.2 million on internet gross sales of $382.3 million, accounting for 62% of Douglas’ whole income.

WTS supplies manufactured municipal snow and ice management merchandise, in addition to upfitting of attachments and storage options beneath its Henderson model. By way of its Dejana banner, Douglas additionally gives upfitting of truck storage and utility tools merchandise. Whereas WTA focuses on gentle vehicles, WTS upfits Class 3-8 and different business work autos. Roughly half of this section’s internet gross sales is derived from supplier clients, with the steadiness a operate of fleet gross sales to authorities entities (~40%), in addition to elements and equipment (~10%). With ~2,800 clients, WTS generated FY22 Adj. EBITDA of $8.6 million on internet gross sales of $233.8 million, accounting for the steadiness (38%) of the corporate’s high line.

Strategy

Demand for snow and ice management tools is often a operate of snowfall, which could be extremely variable year-over-year. That mentioned, it’s pretty constant over the lengthy haul, with combination snowfall ranges over any rolling ten-year interval within the 26 snow-belt states starting from 2,782 to three,345 inches since 1984. To offset the seasonality of its enterprise, Douglas gives pricing, fee, and freight incentives in 2Q and 3Q to construct backlog and supply visibility.

Its capital allocation technique entails fee of a quarterly dividend – which it has elevated 15 instances prior to now 13 years – upkeep of internet leverage in a variety of 1.5 to three.0, and a share repurchase program.

Efficiency Recap

Regardless of already controlling important market share, Douglas was capable of enhance its non-GAAP earnings 67% between FY17 and FY19 to $2.42 a share on a internet gross sales enhance of 20% to $571.1 million – a operate of its potential to push by greater costs as snowfall returned to regular ranges after a weak FY17. The corporate’s inventory value greater than mirrored this development, rising 72% to $55.00 a share over the 2 years ending YE19. This efficiency additionally capped a robust seven-year run, throughout which it grew its high line at a 22.2% CAGR (FY12 to FY19) on the again of three acquisitions (TrynEx, maker of SnowEx – 2013; Henderson – 2014; and Dejana – 2016).

Douglas was then considerably impacted by the pandemic in FY20, with provide chain points precipitating decreased class 4-6 chassis manufacturing, and the closure of municipal amenities, which means fewer orders from authorities entities. If this existential disaster wasn’t sufficient, snowfall in the course of the six-month snow season ending March 31, 2020, was 23% decrease than the 40-year common. In whole, non-GAAP earnings cratered 51% to $1.18 a share on a 16% decline in internet gross sales to $480.2 million.

Satirically, gross sales have rebounded regardless of snowfall remaining tepid, with the 2021 season (ending March 31, 2021) (down 9%) and the 2022 season (down 13%) under the annual common since 1980. That mentioned, each years have been enhancements over 2020, which boosted demand, permitting the corporate to extra readily go by value will increase. In consequence, FY21 gross sales improved 13% to $541.4 million, with FY22 eclipsing FY19 at a file $616.1 million. Nevertheless, the underside line didn’t return to pre-pandemic ranges as materials, labor, and value 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 those 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 roughly mirrored these developments, rebounding from a pandemic-selloff low of $24.12 in March 2020 to $51.44 in March 2021, anticipating a return to regular that did not materialize. As such, its thinly traded inventory almost roundtripped, buying and selling as little as $25.63 a share in Could 2023 after a disappointing Q1 2023 earnings report, the operate of one other weak snowfall season (14% under the ten-year common), punctuated by multi-decade lows (down as a lot as 90% from regular) in its core I-95 hall markets. Its inventory has hovered round $30 ever since.

Q2 2023 Earnings & Outlook

Surprisingly, Douglas’ efficiency in 1H23 was nearly equivalent close to the highest of the revenue assertion versus the prior yr interval, with Douglas producing gross revenue of $72.6 million (25.1%) on internet gross sales of $289.8 million as in comparison with $72.3 million (24.9%) on internet gross sales of $290.2 million in 1H22.

That consequence was really resulting from Q2 2023 representing a marked enchancment over Q2 2022 (and 1Q23), with the corporate posting earnings of $1.11 per share (non-GAAP) and Adj. EBITDA of $43.3 million on internet gross sales of $207.3 million versus $0.85 per share (non-GAAP) and Adj. EBITDA of $34.1 million on internet gross sales of $187.6 million in 2Q22 – representing will increase of 35%, 27%, and 11%, respectively – on July 31, 2023. Gross revenue margin improved from 27.3% in Q2 2022 to 29.6% in Q2 2023. The underside line beat Road consensus by $0.22 a share whereas the highest line was $13.6 million higher.

The sturdy exhibiting was led by WTA, which generated Adj. EBITDA of $42.3 million (30.0% margin) on internet gross sales of $141.2 million. WTS continued to be dragged down by provide chain constraints at school 3-6 work vehicles, producing Adj. EBITDA of $1.0 million (1.5% margin) on internet gross sales of $66.0 million.

Regardless of the continued bottlenecks, administration was cautiously optimistic, citing a near-record backlog, together with 12 to 18 months in its WTS section. Douglas reiterated its FY23 outlook of $1.55 to $2.00 a share (non-GAAP), Adj. EBITDA of $85 million to $100 million, and internet gross sales of $620 million to $650 million. Shares of PLOW didn’t budge on this information, remaining close to $30.

Steadiness Sheet & Analyst Commentary:

Regardless of its challenges, the corporate has been a constant supply of dividend revenue, at present paying a quarterly distribution of $0.295 a share for a present yield of three.9%. On June 30, 2023, it held money of solely $3.4 million, however that low determine was a operate of seasonality and dealing capital biking, with entry to a further $75.5 million of liquidity by a revolving credit score facility. That mentioned, its debt totaled $263.6 million on the finish of Q2 2023, for internet leverage of three.0, the excessive finish of its goal vary. As famous beforehand, the board authorised a $50 million share repurchase program in February 2022, though it has not acquired any shares in FY23, leaving $44.0 million remaining on its authorization.

With a sub-$1 billion valuation, the Road following is comparatively sparse however upbeat, with DA Davidson ($40 value goal) and Robert Baird ($46) each constructive on Douglas. On common, they expect the corporate to earn $1.73 a share on internet gross sales of $632.4 million, adopted by $2.42 a share (equaling its FY19 peak) on internet gross sales of $676.0 million in FY24.

CEO & President Robert McCormick can also be bullish, primarily based on his September sixth buy of 10,000 shares at a median value of $30.71.

Verdict:

Though not a celebration to any collective bargaining settlement, the persevering with UAW strike may create one other provide chain kerfuffle for Douglas Dynamics, Inc. That however, if the corporate achieves its FY23 outlook, it will likely be resulting from value will increase and COGS reduction, as volumes are projected to be decrease versus FY22.

Its inventory at present trades at simply over 18.5 instances FY23E EPS, an EV/FY23E Adj. EBITDA of beneath 11, and a price-to-FY23 gross sales of 1.1, all of that are ample valuations for a snowplow and salt spreader producer with substantial market share. The corporate is forecasted to earn considerably extra in FY24, however that forecast shouldn’t be significantly steady given the unknowns concerning snowfall year-to-year.

Administration is sound and the dividend – its high precedence – is engaging and safe, however betting on significant development from Douglas is difficult. Regardless of its acquisition pushed development spurt within the prior decade, Douglas is an erratically cyclical enterprise, deserving of a reduced a number of. Though its inventory may shock to the upside, present value ranges don’t warrant funding in Douglas Dynamics, Inc.

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