We're joined this week by contributing editor Glenn Rogers who only knows about the terrible winter Canada has had through media reports - he lives in southern California. But every snow cloud has a silver lining, in the sense that it makes money for someone and he has found such a company for us. Glenn is a successful businessman, entrepreneur, and investor who has worked in both Canada and the U.S. Here is his report.
Glenn Rogers writes:
Okay, I'll admit to feeling a little guilty writing this column. I'm looking out onto the Pacific Ocean with the temperature currently at 85°F whereas I understand most of Canada is still pretty wintry. I have family living in Toronto and they tell me this is been one of the worst winters in 20 years. Judging from our gleeful California weather forecasters who have been deluging us with footage of howling winds and blowing snow for the past several months, they aren't kidding.
Of course, as in most disasters, there are a few who benefit and so as the snows begin to recede you can take some time to review your portfolio and have a look at a stock with one of the great symbols of all time. That company is Douglas Dynamics Incorporated (DDI) and it trades under the symbol PLOW on the New York Stock Exchange. Guess what they make. That's right, snowplows!
- Warning! GuruFocus has detected 6 Warning Signs with PLOW. Click here to check it out.
- PLOW 15-Year Financial Data
- The intrinsic value of PLOW
- Peter Lynch Chart of PLOW
More specifically, they make plows for light trucks that many private contractors use to clean driveways in both urban and rural areas and in parking lots everywhere. The company also acquired a business that spreads salt and sand and all the other stuff that you curse when you're driving your new car over it, but that nasty stuff makes it possible for people to move around in winters like this one.
Additionally, they have a small operation that kicks in over the summertime, which is turf care products. Golfers are used to seeing these folks running around spreading fertilizer, cutting fairways, and spraying weed killer all over the place. The company also manufactures large equipment mounted brooms that are used to keep worksites clean and safe.
Obviously, these two divisions help balance out what is essentially a winter-driven business that is clearly cyclical in nature. Not all winters have been, or will be, as good for the company as the one we are (hopefully) about to wrap up.
The company is based in Milwaukee, Wisconsin and has been operating for over 60 years. Its sales are primarily in North America but it also has several outlets in Europe, China, and Latin America. DDI enjoys over 50% share in the professional/contractor market competing with companies like TORO (NYSE: TTC).
Throughout most of its history DDI was private, eventually being purchased in 1991 by Armco Inc., a specialty steel company. Armco ultimately sold the business to an investment group, which took it public in 2010. I'm normally leery about companies owned by investment groups since they tend to worry about themselves first and the investor second and recently the stock dove when they announced a five million share offering designed to take money off the table for that group. The stock has since rebounded and the fourth-quarter results played a large part in that recovery.
Net sales in the quarter increased 158.9% to $73 million (figures in U.S. dollars), largely because of the bitter winter weather the north has been having. Full-year results for 2013 show revenues increasing by 38.8% year-over-year, coming in at $194.3 million. Net income doubled year-over-year to $11.6 million, which is somewhat attributable to the stock purchase of TrynEx in May 2013. This acquisition added the aforementioned salt and sand spreading equipment business but it negatively impacted earnings per share in 2013 by $0.20. The acquisition is expected to the accretive to earnings in 2014. With all that in mind the company reported adjusted EBITDA of $46.6 million for the full year of 2013, which was a 49.9% increase over the prior year.
As you can imagine these stellar results were received well by Wall Street and the stock is trading near its high closing Friday at $17.52. The stock did go ex dividend last week and it is certainly worth noting that at current prices the yield is about 5%. The company recently raised its quarterly dividend by a modest 2.4%, which it has steadily been doing annually since the stock went public.
This is a small company as you can see from the numbers, which may make it an interesting acquisition target at some point. Given that there is a financial owner involved certainly makes this possibility more likely.
The investment thesis is that coming off such a strong year it is likely that the retailers who distribute their products will have also have had a good year, as will the operators who will ultimately buy the equipment. This makes it likely that DDI's order book should be quite strong going into next winter. Also the strong financial performance allows them to maintain the dividend, potentially buy back stock, pay down debt, or do another acquisition.
All that said, you are certainly not buying at the bottom so given that the market is a little uncertain, to say the least, you may want to wait for a pullback, if one shows up, before you establish a position. I think there's a decent chance that the stock will trade over $20 this year and with the 5% yield it's not a bad play.
Action now: Buy with a target of $21.