Image source: Douglas Dynamics.
Every year, the thousands of state and local government agencies responsible for keeping roads and bridges safe throughout the winter have to ensure that they have the equipment they need to get the job done. As a specialist in snow plows and other equipment for dealing with tough winter weather, Douglas Dynamics (PLOW 0.91%) thrives in the run-up to winter. Coming into Monday's third-quarter financial report, Douglas Dynamics investors had looked for a solid uptick in sales that would translate to healthy earnings growth. What they got, though, was an even better performance than expected, as the same preordering trends that helped road-salt maker Compass Minerals (CMP 0.15%) also favored Douglas' snow and ice equipment business. Let's look more closely at how Douglas Dynamics generated record results and what's ahead as winter gets closer.
For Douglas Dynamics, winter is coming
Douglas Dynamics' third-quarter results showed a lot of strength in the industry right now. Revenue soared 53% to a record $120.6 million, topping the consensus forecast by more than $10 million. Net income jumped 45% to $15.5 million, and that produced adjusted earnings of $0.68 per share, which was $0.08 per share better than most investors had expected.
As we've seen in recent quarters, the acquisition of Henderson Products toward the end of 2014 was responsible for much of the sales gains that Douglas experienced. Once again, though, Douglas Dynamics has also seen government entities finally come through with long-awaited orders, as pent-up demand has finally given way to the immediate need for new equipment. Douglas said that a strong preseason order period led to greater deliveries of equipment during the quarter.
Not everything went perfectly for Douglas Dynamics. Gross margins fell by three full percentage points to 33.9%, showing some of the pressures that a big jump in sales can create for a company. Operating expenses rose at a slower pace than revenue, helping to cushion the blow to operating margins, but a big rise in income-tax expenses and interest costs were a big part of the reason why Douglas Dynamics' bottom line grew at a slower pace than its revenue.
CEO James Janik was very happy about the tenacity that Douglas Dynamics displayed. "We began this year knowing we would face tough comparisons to our record performance in 2014," Janik said, but "our team has risen to the challenge and produced record results again." New product launches, efficiency gains internally, and a dedicated workforce all contributed to the company's success as Janik sees it.
What's next for Douglas Dynamics?
Janik also stayed excited about the near future. "When viewed in aggregate," the CEO said, "the outlook for our business remains very positive." Lower gas prices have boosted light-truck sales, and positive dealer sentiment, favorable trends for inventory in the field, and the strong order activity should all combine to let Douglas Dynamics finish 2015 on a positive note.
Despite the strong results, though, Douglas Dynamics merely repeated its past guidance rather than upgrading it. As a result, the company is still looking for revenue of $385 million to $420 million and earnings of $1.70 to $2.05 per share. The company warned that winter conditions would still be relevant to its results, with the outlook assuming an average level of snowfall and generally stable conditions throughout the economy.
One thing to keep in mind is that Douglas Dynamics' acquisition of Henderson took away some of its seasonality. Investors in Compass Minerals have seen the same effect from that company's agricultural-products business, which runs in a different cycle than Compass' road salt sales. Similarly, because Henderson works more closely with municipalities and follows their budget and planning cycle more closely, its results are more transparent and reliable than the on-demand nature of Douglas' traditional business.
Douglas Dynamics has been a quiet stock recently, with traders seemingly content to let the share price drift during the offseason. As winter comes on, though, Douglas Dynamics will likely get more attention from investors following seasonal trends, and a cold season could bring more record growth to the company in the months ahead.
