Over the past six months, Douglas Dynamics has been a great trade. While the S&P 500 was flat, the stock price has climbed by 16.2% to $29.15 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Douglas Dynamics, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Douglas Dynamics Will Underperform?

Despite the momentum, we don't have much confidence in Douglas Dynamics. Here are three reasons why there are better opportunities than PLOW and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Douglas Dynamics’s sales grew at a weak 1.5% compounded annual growth rate over the last five years. This fell short of our benchmarks.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Douglas Dynamics, its EPS declined by 2.4% annually over the last five years while its revenue grew by 1.5%. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Douglas Dynamics’s margin dropped by 5 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. Almost any movement in the wrong direction is undesirable because of its relatively low cash conversion. If the longer-term trend returns, it could signal it’s becoming a more capital-intensive business. Douglas Dynamics’s free cash flow margin for the trailing 12 months was 9%.

Final Judgment

Douglas Dynamics falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 15.1× forward P/E (or $29.15 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at one of our top software and edge computing picks.

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