Business Basics

Douglas Dynamics (PLOW, Financial) specializes in the manufacturing and upfitting of commercial work truck attachments and equipment. The company has two operating segments: Work Truck Attachments (WTA) and Work Truck Solutions (WTS). The Work Truck Attachment segment contributes 47% to the total revenue and focuses on the manufacturing of ice and snow control attachments that are marketed under its three key brands: Fisher, SnowEx, and Western. These three brands offer snowplows and sand/salt spreaders to Class 1-3 trucks (Light Duty) such as the Ford F-150. The segment generates 85% of the revenue from equipment sales and 15% from parts and accessories sales. The Work Truck Solutions segment, generating 53% of total revenue, includes municipal snow and ice control products under the Henderson brand and upfitting services for attachment and storage solutions under the Dejana. The Dejana brand serves Class 3-6 trucks (Medium Duty) such as the Ford F-450, while the Henderson brand caters to Class 7-8 trucks (Heavy Duty) such as Freightliner. Douglas Dynamics primarily markets its products through North American truck equipment and lawn care equipment distributors, with a strong presence in the snowbelt regions, including the Midwest, East, and North East.

Third Quarter FY 2024 Earnings Review

The net sales in the quarter declined by 19.2% year over year to $129.4 million due to reduced snowfall in the previous two snow seasons, leading to a volume decline in the Attachments segment. This decline was partially offset by an improved price realization in the Solutions segment. On the profitability side, the gross margins in the quarter improved by 160 bps year over year due to the 2024 Cost Savings Program and strategic pricing actions. However, the adjusted EBITDA margin declined by 20 bps year over year to 11.8% due to increased SG&A expense as a percentage of revenue. The increase was primarily due to the CEO transition costs and higher incentive-based compensation. The improvement in profitability was further impacted by a higher tax rate in the quarter due to a sale-leaseback transaction, leading to flat growth in the adjusted EPS to $0.24.

What's the Outlook for PLOW?

Over the last five years, Douglas Dynamics' revenue grew slower, from $524 million to $568.2 million with a CAGR of 1.63%. In FY 2023, snowfall in most markets, especially on the East Coast, was below the 10-year average levels. This led to slower orders from the dealers as the inventory at their end started piling up, further elongating the replacement cycle (usually 9 to 12 years). The revenues in FY 2023 were impacted and were down 8% year over year to $568.2 million. This further continued in 2024, as the revenue in the first nine months of FY 2024 was $425 million compared to $433 million in 9M FY 2023.

Source: Created by Warp Analysis

Looking forward, I believe that even if there is an above-average snowfall in the fourth quarter (which is expected), the company should not be able to see a healthy reorder activity in the WTA segment as dealers will first bring down their inventory levels and then reorder. This should impact the company's order book and backlog for FY2025. Hence, for the next two to three quarters, I have a pessimistic outlook for the company's topline and bottom-line growth. For the fourth quarter of FY 2024, I am assuming revenue growth to be flat year over year at $135 million, impacted by negative volume growth in the WTA segment, which should be offset by higher price realization in the WTS segment. Overall, for FY 2024, revenue should be $560 million. Beyond FY 2024, I am assuming revenue growth to be 2% up until FY 2027, after which it should grow by 7% with the improvements in dealer inventory levels and a better snowfall in the core markets.



Source: Created by Warp Analysis

On the profitability side, the company's gross margins and adjusted EBITDA margins declined by 590 bps and 690 bps to 23.6% and 12% over the last five years. This extreme decline was due to lower volumes resulting from unprecedented weather conditions, increased overhead costs, inflationary impact on raw material, labor, and advertising costs, and higher borrowing costs on revolving credit lines.

To tackle this headwind, the company introduced a cost-saving program in 2024, which focuses on reducing headcount and streamlining processes based on market demand. An example of streamlining processes would be that in September 2024, the company completed the sale-leaseback transaction of 7 facilities of manufacturing and upfitting space. This deal positively impacts the company as the rental expense under the lease is lower compared to the interest expense on the term loan debt, resulting in an improved bottom line.

For FY 2024, I am assuming the company should be able to achieve an adjusted EBITDA of $72.5 million and an EBITDA margin of 13%, which is 80 basis points more compared to FY 2023. The reasons are the continued improvement in operational efficiency, lower interest expenses as debt is reduced, and higher price realization. Beyond FY 2025, as the dealer inventory levels improve, a better product mix, increased volume growth, and efficient operations should help achieve the EBITDA margin of 15%.

Should We Buy Douglas Dynamics?

Source: Created by Warp Analysis using Alpha Spread

Based on my DCF calculation using FCFE, the stock is slightly undervalued, as the intrinsic value is $26.76, which is close to the current market price of $24.34. However, I believe despite trading at a lower valuation, it would not be a good idea to create a new position or hold onto the stock as the headwinds faced by the company should continue over the next two to three quarters. The current dealer inventory levels are on the higher side and the company is still working on improving its operations based on market demand. These factors should continue to impact the company's top line and bottom line at least till the first half of FY 2025.