Market Overview

Douglas Dynamics: Let It Snow, Let It Snow, Let It Snow....

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Price: 12.75
Forward P/E: 15
Earnings Growth: -33%
Projected Sales Growth: -19%
Market Cap: $282 million

Why It's Featured: Mild winter caused unusual low earnings; yield is 6.4%; strong cash flow to cover it.
Danger Zones: It all depends on snow fall.

Douglas Dynamics, Inc. (NYSE: PLOW) designs, manufactures, and sells snow and ice control equipment for light trucks in North America.  It principally offers snowplows, sand and salt spreaders, and related parts and accessories.

The company sells under WESTERN, FISHER, and BLIZZARD brands through a distributor network primarily to professional snowplowers.  The company was founded in 2004 and is headquartered in Milwaukee, Wisconsin.

A couple of things caught my eye about PLOW.  It's the first stock I've seen that has 4 letters in its symbol that trades on the New York Stock Exchange.  It used to be that all stocks with 4 letters traded on the NASDAQ and those with less than 4 traded either on the NYSE or the AmEx (which is no more).  (For more stock ideas, see www.theonlineinvestor.com) (For a new approach to investing, see www.wealthoptima.com)

The second eye catcher was the yield: 6.4%.  That's a big dividend for such a little stock (Market Cap of $282 million).  Last year's payout was $1.175, but this year is on schedule to pay 82 cents.  The question is: how long can it keep paying out that much?

The first place to look is earnings.  Last year, they were 85 cents.  This year, 5 analysts have a consensus estimate of 60 cents but have a range of 50 cents to 65 cents.  For next year, they see 86 cents with a range of 65 cents to $1.17.  Clearly, these analysts don't see the company the same way.

As for investors, they should err on the side of caution and expect the dividend to be cut.  Not so much because of earnings (though they are a bit shy this year).  Rather, it's the capital expenditures that will no doubt need to be made in order for the company to grow.  Capex takes money and that usually comes first from dividends.

First quarter wasn't kind to Douglas.  With a warm winter, there wasn't as much snow so its products weren't as much in demand.  Earnings finished the period with a loss of 19 cents, 2 cents worse than analysts predicted.  That was in contrast to fourth quarter when earnings came in at 29 cents, 32% above the 22 cents forecast.

Total revenues were $8.6 million, a new low for the public company (the IPO was in 2010).  In the fourth quarter, sales were $60.3 million.  The first quarter of each year has always shown the weakest results since most buyers are in the market in the fall, preparing for winter months.  Most analysts think the mild winter was a unique event and expect a more normal weather pattern this year.

The company certainly sees it that way.  Inventories are high, above last year, in anticipation of a normal winter and higher demand.  On the other side of the aisle are the customers who may think that last year is an indicator that a warming trend is here to stay, suggesting that new snow equipment may not be necessary.  Time will tell who is right.

Douglas is the dominant player in this market with more than 50% of the market share.  Competition is nipping at its heels, but it's still the elephant among the wolf pack.  The biggest problem PLOW has is that it's highly dependent on snow and very cold weather.  If there is another mild to warm winter, expect the same results from the first quarter.  Customers won't feel the need to buy new equipment. 

The balance sheet is getting a little levered up.  Debt is 42% of capital.  Operating cash flow is solid at $26 million.  Total debt is $113.3 million.  Cash is $14.21 million, good enough to put the current ratio at 6.10.  Total interest coverage is 4.4 times.

- Essential Numbers:
- Trailing P/E: 18.35
- Price to sales: 1.47
- Price to book: 1.84
- Operating margin: 17.65%
- Profit margin: 7.94%
- Return on equity: 9.98%
- Return on assets: 6.41%
- Revenues (last 12 months): $193.87 million
- Cash per share: 64 cents
- Debt to equity: 73.15%
- Book value per share: $7.00
- 52 week change: -14.23%
- Shares outstanding: 22.13 million
- Float: 20.44 million
- Held by insiders: 7.56%
- Held by institutions: 89.1%

If investors think this winter was a fluke and a colder one lies ahead, then PLOW will be of great interest.  The dividend is most attractive.  But if the company decides to expand or this winter repeats the last one, that dividend is vulnerable.  It would seem the "smart" money (i.e. institutional funds) thinks things will be just fine.  They own almost 90% of the stock.

- Company Web site: www.douglasdynamics.com

- Ted Allrich, Founder The Online Investor and WealthOptima
May 31, 2012

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Ted Allrich is Chairman of the Board of BofI Holdings Inc. and Bank of Internet USA. He is also the Founder of The Online Investor (www.theonlineinvestor.com), a site that offers investment ideas and in

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