CAPScall of the Week: Douglas Dynamics

For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'd like to take a closer look at Douglas Dynamics (NYSE: PLOW  ) .

What Douglas Dynamics does
Douglas Dynamics manufactures and sells snow and ice control equipment like snowplows, sand and salt spreaders, and other related accessories, under the Western, Fisher, and Blizzard brands for light trucks in North America.

In Douglas Dynamics' third quarter, which was reported earlier this month, the company noted a 29% decline in total quarterly sales to $37.8 million, which it attributed to record-low snowfall and drought levels, which negatively affected both its snow product sales, as well as its customers' investments in the company's products. 

Whom it competes against
Douglas Dynamics doesn't have too many competitors anywhere near its size. Instead, its biggest competitor tends to be the weather trends themselves.

These record-low levels of snowfall not seen in the past 50 years have crippled many winter-related companies. Snowmobile and ATV makers Arctic Cat (Nasdaq: ACAT  ) , Polaris Industries (NYSE: PII  ) and even to some extent, Honda Motor (NYSE: HMC  ) have been able to grow snowmobile sales thanks to new and innovative designs, but growth has definitely slowed from previous years. These three companies have also turned to multiseason ATV growth to boost their bottom line and, in Honda's case, its extensive line of vehicles as well.

Ski destination Vail Resorts (NYSE: MTN  ) has been another casualty, with EBIDTA dropping 4% from the prior year as price increases didn't quite make up for the record low snowfall.

In addition to record-low snowfall levels, record drought levels, according to management, hampered professional plowers who often turn to landscaping during the warmer summer months to earn enough money to invest in plowing products come winter. In short, dry weather is Douglas Dynamics' ultimate enemy -- not necessarily the businesses it competes against.

The call
After carefully reviewing the prospects for Douglas Dynamics, I'm going to play the role of weatherman and make a CAPScall of outperform on the company.

To me, this seems like a pretty straightforward call, given that we've witnessed extremely low snowfall and very low rainfall in 2012. Simply playing on the averages we've witnessed in snowfall and rainfall over the past 100 years, you'd see that this year is far outside the norm and thus not truly indicative of what Douglas Dynamics is capable of. It's also going to give Douglas some ridiculously easy comparisons next year if we return to normal snow and rainfall levels.

Another factor I haven't mentioned yet is the company's impressive dividend. Douglas' dividend, which is currently paying out 6.1%, probably isn't sustainable at current levels, but the company has made it clear that rewarding shareholders through quarterly stipends is in its plans going forward.

As long as North American GDP is rising and the weather in that region returns anywhere close to normal, then Douglas Dynamics at 17 times forward earnings and yielding 6% makes a heck of a lot of sense to me!

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