I guess it is the great Ben Graham who gets credit for the quote:
“Buy your straw hats in winter”
I did a screen a few days ago looking at all stocks within 30% of their 5 year low. This type of screen is used to find ideas that are a little more “pricey” than your average value stocks.
One new name that showed up was Douglas Dynamics - PLOW - $31. They make snow plows. What could be more exciting?
In a very early post I discussed the concept of doing a “one-hour analysis”. This is a quick review to see if I want to dig deeper into a company. Let’s discuss a few steps:
I took a quick glance at the Seeking Alpha valuation page. Selling at roughly 1.5x EV/sales for a manufacturing company is ok, but not exciting. Scroll to the bottom of the tab an you get a quick glance at the balance sheet which is again ok, but not exciting. A quick glance at Gurufocus showed an interest coverage ratio of 5x, again ok but not great.
These days I tend to start by trying to find a company presentation. Sometimes you can find them in the Seeking Alpha news tab, or you can find them at the company web site. PLOW has a nice presentation. The pictures showed products for all sizes of trucks. Looks like they have stuff for clearing parking lots and even driveways, not just highways. They had a few charts showing average snow fall has been low for the last few years. I do not wish to dive into the climate change arguments. I think even the climate change advocates might believe that weather will be more variable going forward. The very simple idea that this company might benefit from a big snowfall year, is a significant positive.
The company has a 2025 goal of EPS of $3.00. I generally like companies that give a long-term goal in addition to just next year guidance. A very simple 15x (a very rough market multiple) a $3.00 estimate gives me a very rough target of $45. Sorry my valuation approach is not more complex, but all I am doing is a rough sketch.
As I do this quick target price, I also notice a 4% dividend yield. Not bad for a smaller company, but also maybe a little sign of a problem. Value guys should always be on guard for TGTBT - To Good To Be True.
I take a quick look at the earnings pattern. PLOW made $2.40 in 2017, so that $3.00 target is not impossible. Earning have been variable. That is ok, even preferred. Variability creates opportunity.
I notice that SA reports only 2 analysts follow the stock. I would expect at least 5 for a company in the $500 million to $1 billion market cap range. It is a decent positive that Wall Street seems to ignore the company.
There were no informative SA reports. I wish there were at least a couple. SA is always a mixed bag.
I am embarrassed to learn the company is in my old hometown of Milwaukee. I use Wikipedia to understand the company’s history. They were once owned by a big steel company (AK Steel), and then flipped to a private equity firm. That is a small negative. I prefer companies that have not gone through the private equity “mill”. Private equity guys tend to under-invest in capital expenditures. PLOW came public in 2010 with First Boston as the lead underwriter, at least this is better than a regional firm.
I do a quick check of the price performance tab on SA. The stock has been an average performer over 10 years (again not bad for a small non-tech company) , but has significantly underperformed for 1 - 3, and 5 years. As a value guy, I see this as a positive.
A very important step is to understand who owns this stock. I use Gurufocus. The only value guy I see is Chuck Royce. Chuck is a legend, but they own over 1000 stocks, so not much of a positive. There are two 10% owners I never heard of before Conestoga and Allspring. I must know more. Allspring is old division of Wells Fargo in Charlotte, they have interesting mid-cap fund, but nothing that important. Conestoga is another story. They are growth stock investors that own a snow plow company. I have never heard of most of their 20 top holdings. This is very intriguing. CCALX deserves further study. It looks like they tend to sell their losers, it will be very interesting to see if they still own PLOW at 6/30. I wish at least one other strong value guy owned the stock, but sometimes you are the first vulture to the carcass.
I want to know a little more about management. The CEO has been there for a long time and comes from the financial side. I would prefer an operating guy, but a financial guy is better than a marketing or legal background. Mr. McCormick got his undergraduate at a small school called UW-Whitewater. Whitewater was a school I considered going to so I could play on their golf team in the 1970’s. Oh my God, I could be running a snow plow company. I would prefer a group with stronger outside directors, but sometime small and folksy is ok. I would prefer more stock ownership by management, but that is not a deal killer.
The CEO is also a board member of a small public company called Mayville Engineering - MEC - $14. They appear to be a contract manufacturing company located in a small rural Wisconsin town of 5,000 souls. I must know more. The market cap is only $200 million, but why is it public? I cannot stress strongly enough how important it is to be on the lookout for this type of related company. Your search is never done. Now I add CCALX and MEC to my to do list.
There are lots of positive here, but now comes the problem. I have a new rule. WHEN THE COMPANY PRESENTATION DOES NOT HAVE A SPECIFIC SLIDE COVERING THE BALANCE SHEET, SUSPECT A PROBLEM. PLOW’S debt structure is a mess. Trying to read the footnote on their term loan agreement and their interest rate swap gave me a terrible headache. The debt load is manageable, but far more than ideal. This is the kind of situation that leads to dividend cuts at small companies. I can almost smell the activists warming up in the bullpen. What a horrible mixed metaphor. I could call the company and try to understand the details, but I am a lazy bastard. No more precisely, I am a calculating lazy bastard that will allocate his time elsewhere. If CCALX still owns the stock at 6/30, I will revisit the stock.
Again, I am haunted by this bank mess. I would love to own a snow plow company run by slow talking guys in Milwaukee. There are lots of problems I can live with. If this company had a $250 million dollar, 3.5% coupon bond due in 2030, I would own the stock.
In the 1980’s bank there was a small Texas homebuilder that was very conservative. He never bought extra land or built ‘spec” homes. One day his banker called and told him they were calling in his loan. “Why me?” he asked, “Because you are the only one that can afford to pay us back” came the terrifying answer from the banker.
Thanks for showcasing your 1-hour-analysis process. An instructive read.