Winter Is Coming for This Snowplow Maker

10/29/2020 5:00 am EST


Douglas Gerlach

President, ICLUBcentral, Inc.

Headquartered in Milwaukee and with facilities throughout the Midwest and Northeast, Douglas Dynamics (PLOW) manufactures and installs snowplows and other work truck attachments, asserts Doug Gerlach, editor of Investor Advisory Service.

The company enjoys a strong competitive position within its snow removal niche. Revenue can be lumpy, but the company’s products serve a predictable need that is not going away.

The snow removal market grows at about the pace of overall GDP, with incremental growth opportunities coming from acquisitions and product line extensions.

The company typically converts more than 100% of earnings to free cash flow and also returns about half its profits to shareholders through dividends. Snow and ice removal accounts for more than 80% of revenue.

Free cash flow has consistently run about $60 million per year over the past five years. That equates to a free cash flow yield of over 7% based on the current market capitalization. The company’s return on equity has fluctuated between the mid-teens and low twenties during this period.

2020 will be a challenging year, but the company expects free cash flow to cover its 3% dividend yield. A 3% dividend yield is nothing to scoff at in a world where 30-year Treasuries pay 1.6%.

As long as this year’s snowfall is not too far below average, this could be a good time to acquire shares at a discount to the market.

We model 10% compound EPS growth. This is similar to both its historical longterm trend when trough years are eliminated and the internal growth rate implied by its average return on equity (21.4%) and its earnings retention (one minus its 49.8% dividend payment rate). If achieved, 10% growth would generate EPS of $3.40 in five years.

That figure, combined with a high P/E of 20.8, generates a high price of 71. For a low price, we apply a low P/E of 13.1 to 2019 EPS of $2.11 and get 28. On that basis, the upside-to-downside ratio is 3.7 to 1. In a rich market, the shares are priced reasonably.

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