Douglas Dynamics Sees Earnings Fall, Has High Hopes for Dejana

By Markets Fool.com

Seasonal businesses are often complicated to analyze, and Douglas Dynamics (NYSE: PLOW) historically had its fortunes tied to winter weather and the need for snow-moving and ice-fighting products. Yet given the frustrations from mild winters in recent years, the company made efforts to diversify its business exposure. Coming into Monday's third-quarter financial report, Douglas Dynamics investors didn't expect to see strong results, but they were hoping that the new inclusion of the recently acquired Dejana business would open up new opportunities for the company. Douglas Dynamics wasn't able to deliver a positive surprise in its financial report, but it does seem optimistic about its future as a better-diversified company. Let's take a closer look at how Douglas Dynamics did and what it sees ahead.

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Image source: Douglas Dynamics.

Douglas Dynamics takes a siesta

Douglas Dynamics' third-quarter results didn't quite live up to the hopes that many investors had for the company. Revenue rose just 2.5% to $123.6 million, which was far less than the consensus forecast for about $132 million in sales. Net income fell by more than half to $7.3 million, and that worked out to $0.32 per share, or $0.07 less than what investors had expected to see from Douglas Dynamics.

Looking more closely at the report, the first thing to notice is that the acquisition of Dejana had a material impact on the company's results. Because of the new consolidation of the business, shipments that would have previously shown up in Douglas' results this quarter will instead be delayed into future quarters, because Dejana hasn't yet sold the equipment to end users. Douglas estimated that the negative impact amounted to $0.17 per share, which by one measure would have produced better-than-expected bottom-line performance.

Nevertheless, Douglas Dynamics' core work-truck attachments business had challenges of its own. The company said that results for snow and ice products were lower than in the year-ago quarter because of below-average snowfalls in the most recent winter. In addition, the third quarter of 2015 was particularly strong because Douglas introduced a new lineup of 20 products that helped meet pent-up demand. The company also said that Douglas saw a more balanced sales season this year, with sales that had been deferred into the third quarter in 2015 instead taking place in the second quarter of 2016. That helped the second quarter's results, but at the expense of this quarter's numbers. Nevertheless, operating income of $24.1 million represented the entire company's success, given that the work-truck solutions business recorded a small operating loss of $400,000.

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Nevertheless, CEO James Janik put the results in context. "This was a very important quarter in our company's history," Janik said. "With the successful completion of the Dejana deal, we have introduced a new segment that focuses on complementary services and products that will be increasingly important to the company in the years ahead."

Can Douglas Dynamics plow ahead?

Moreover, Douglas Dynamics is still optimistic about the future of all of its business segments. In Janik's words, "While we are diversifying and expanding our portfolio, the snow and ice management business will always be the core of our company." The CEO believes that its quality and service give it a competitive advantage over its peers in the industry.

Even with the lackluster results, Douglas Dynamics reiterated its guidance. The company said that it still thinks that revenue will be somewhere between $395 million and $450 million, and earnings per share should come in within a range of $1.36 to $1.79 per share. Those are fairly wide estimates, but Douglas knows that its actual results in the fourth quarter will depend in large part on how the weather is during the early part of the winter season. If conditions are worse than they have been in recent years, then Douglas will have the ability to come in toward the high end of those guidance ranges or even above them.

The addition of Dejana will give Douglas Dynamics some much-needed diversification that should make its stock less dependent on winter weather. Still, because so much of its business still relies on snow and ice, investors shouldn't expect a quick change in Douglas Dynamics' seasonality right away.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Douglas Dynamics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.