Navellier’s “One Winter Stock to Buy Now”

by Travis Johnson, Stock Gumshoe | December 1, 2014 4:38 pm

“—Special Winter Bulletin—

“Polar Vortex or Not… Old Man Winter Is Making Us A Blizzard’s Worth of Profits

“Look for at least 50% profits in one company that thrives during times of severe winter weather in North America….”

That’s the intro to the teaser pitch from Louis Navellier[1] that caught my eye when I returned from my Thanksgiving travels — the ad was clearly timed for the snow that so many folks received during Thanksgiving week, and the horror stories from Buffalo, NY where they got five FEET of snow in their late-November storms.

So what’s he pitching?

It’s a company that is somehow connected to snow removal equipment, like snowplows, and it’s based in Wisconsin and — thanks to the “polar vortex” — had a huge year last year with blowout growth numbers and a stock that surged after their Winter quarters. And Navellier seems to think this will be happening again, and that it should be starting already with the early snowstorms this year.

Some more about this “secret” company?

“This company has been making money from snow and ice for more than 65 years. It dominates the North American snow removal business—and has even expanded its business to Europe and China[2].

“So how has it grown into such a successful company? It sees an opportunity and it jumps on it.

“Back in the early ‘50s, this company was just a small welding shop with a line of snowplows for Jeeps and small trucks. But management strived for something much, much bigger…

* In the early ‘80s, it purchased a Maine snowplow manufacturer.
* In 2005, it scooped up one of the most innovative and exceptional snowplow lines on the market.
* In 2013, it acquired a highly regarded line of ice control equipment.

“Today, it is the leading manufacturer of snow plows and snow removal equipment in North America, with six well-known and trusted brands that are always in hot demand when winter weather strikes.”

So it’s an established company, and it sounds like they must be a “pure play” on snow in some way — which stock is he teasing?

To make sure we get enough clues to feed the Mighty, Mighty Thinkolator we read on down the ad a bit more, checking the hints about the financials…

“The consensus estimate has been revised sharply higher for our #1 Winter Stock’s earnings for the coming quarter and for full-year 2014.

“In fact, in the past 30 days, analysts have revised their estimates 78% higher for the fourth quarter.

“Fiscal year 2014 estimates have been lifted 30% higher in the past 30 days.

“As I tell my Emerging Growth[3] subscribers, such aggressive analyst revisions higher typically precede another positive earnings surprise.

“So it’s no wonder that investors are starting to take notice. Shares have bounced 25% higher in the past two months alone.

“But mark my words, this is just the beginning.”

Growth momentum, analyst estimate increases and earnings “beats” are key drivers for Navellier’s quantitative system of picking stocks, so most of the time when he’s picking a stock it will have a solid string of big earnings “surprises” and analyst upgrades, part of the very powerful “beat and raise” cycle that drives investor enthusiasm and often makes stocks surge higher.

So which one is it this time? This is Douglas Dynamics (PLOW)[4], which is pretty small (market cap around $500 million) but is probably the only publicly traded “pure play” on snow equipment — they are primarily known for making plows and similar truck attachments, with the company’s roots being in the Western and Fisher brands that effectively merged in 1984 (Western, renaming itself Douglas Dynamics, bought Fisher Engineering), and they did make a big acquisition in 2005 to take over an innovative plow brand called Blizzard, followed by smaller acquisitions in ice and snow control equipment and, just last week, in DOT-grade plow equipment specialist Henderson.[5]

And it’s that Henderson acquisition that actually catches my eye most — that should give them a substantially smoother revenue stream, which is a great fit because the focus on sales to contractors, individuals and smaller operations at Douglas’ other brands is much more erratic, weather-driven and seasonal. State departments of transportation, the folks who run those massive plows on the interstate, do not decide to buy a new plow because there was a big storm — they plot out their purchases for years, which should provide some additional visibility. Douglas is making this acquisition with cash and debt, which is a positive in this environment because debt is cheap, they will likely not have much trouble extending their terms by a few years (though it may cost a bit more), and the deal won’t dilute shareholders. The deal also seems very reasonably priced, they’re essentially “buying” $76 million in trailing annual sales for $95 million — and Douglas has developed good systems for maximizing manufacturing and service efficiencies that have helped to drive performance for at least the last few years. Douglas hasn’t traded down at that kind of price/sales ratio for several years, not since their first few months as a public company back in 2010 — the implied P/S of the acquisition is 1.25, PLOW’s current P/S is approaching 2.

This is a fairly new company in the public markets, though that’s because they went through several iterations and ownership structures over the years — they were bought out by a steelmaker (Armco, now AK Steel) a couple decades ago, then sold to private equity in 2004, cleaned up, and refloated on the public markets with an IPO[6] in 2010. The company estimates that they hold just over half of the North American markets, somwehere in the 50-60% range, though the competitor companies all seem to be either privately held or small parts of big conglomerates.

You can get a good idea of the business from their investor presentation here[7], when you look at their financials there are some things that jump out — first is that they are still reliant on snow, with the “dud” snow season of 2011/2012 cutting into revenues somewhat and with clear seasonal patterns in their annual results (revenues very low in the first quarter every year, for example, then picking up as people prepare for the next year’s snow season), and second that they have pretty consistently squeezed better numbers out of their operations. Return on equity (ROW) and profit margins are both now at new highs and have been improving steadily this year, which is part of why they’ve been clobbering analyst estimates and why the stock has been climbing so nicely.

So is it an easy buy? Well, it is a young, small dividend growth company (current yield just under 4%, they have increased the dividend at least once a year since the IPO, and their payout ratio is only slightly above 50% so should be sustainable), they have had very good results this year, and they continue to guide to a very strong current fiscal year — the analyst estimate of $1.60 or so for current year earnings is right in the middle of the company guidance now, though they had to raise forecasts many times to catch up with the company’s great performance over the last few quarters. The things that could derail them are weak snowfall years, bad acquisitions that end up blowing up in their face, or simply a lousy economy that has snowplow operators keeping their plow for a couple extra years (the typical replacement cycle for their core contractor customers is about 10 years) instead of upgrading to something newer and more efficient.

My first impression is pretty good — the stock is up sharply (though back down slightly from when Navellier touted it during Buffalo’s snowmageddon, perhaps partly because of the latest acquisition they announced), and there are a few things that you’d probably want to get comfortable with before considering buying shares: They are getting a little less seasonal with their acquisitions, but they still will likely do much better in years with a lot of snow in their core Northeast/Midwest markets; they have very little insider ownership and no insider buying[8], which is a little surprising for a small industrial company; and analysts are predicting a much worse year for them next year than this year.

This is the first time I’ve looked at the stock, so I’d want to check it out more carefully — particularly in respect to whether there’s any reason to believe that 2014 is really a peak year and their sales will drop considerably in 2015 as analysts are predicting. If analysts recant that pessimism and start raising expectations for next year, that might be one catalyst for the stock jumping up by 50% in six months as Navellier is predicting — but, of course, if analysts are right and they drop down to a dollar per share in earnings next year then the stock will almost certainly give up this year’s gains.

Meanwhile, I’ll keep an eye out in my neighborhood to see which snowplows look new and shiny and what brand is the local hit — and now that I’m once again safe and warm here on Gumshoe mountain and the ski resorts are opening up for the year, let it snow!

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