Is Good Ol’ WD-40 Still Competitve?

Source: Thinkstock

Source: Thinkstock

Ah, the good ol’ WD-40 company (NASDAQ:WDFC). This is company that makes products many of us are familiar with. For me, it takes me back to my childhood where I remember my grandfather saying such things as, “Oh, that bolt is stuck? Put some WD-40 on it,” and, “That bike chain looks rusty, hit it with some WD, Christopher.” Alas, the stock has been rewarding to shareholders, returning 58 percent in the last two years. But after a lackluster earnings report, is WD-40 a stock to be in?

To answer this question, we must understand what the company does. Most are familiar with the flagship anti-rust product I alluded to above with my childhood recollections. For those who don’t know much else about the company it provides multi-purpose maintenance products under the WD-40 brand for household, marine, automotive, construction, repair, sporting goods, gardening, and various industrial application. This inlcudes multi-purpose drip oil and spray lubricant, and other specialty maintenance products under the 3-IN-ONE brand for household, locksmithing, HVAC, marine, farming, construction, and jewelry manufacturing applications. It also produces industrial grade and specialty maintenance products that include lubricants, penetrants, degreasers, and cleaners under the Blue Works brand for various industrial applications.

But that is not all. The company also provides specialty problem solving products, which comprise penetrants, water resistant silicone sprays, corrosion inhibitors, and rust removers under the WD-40 Specialist name as well as bicycle maintenance products that include wet and dry chain lubricants, heavy-duty degreasers, foaming bike wash, and frame protectants under the WD-40 Bike name.. In addition, it offers homecare and cleaning products, such as liquid mildew stain removers and automatic toilet bowl cleaners under the X-14 brand, automatic toilet bowl cleaners under the 2000 Flushes brand, room and rug deodorizers in the form of powder, aerosol foam, and trigger spray under the Carpet Fresh brand. Finally it offers aerosol carpet stain removers, and liquid trigger carpet stain and odor eliminators under the Spot Shot and the 1001 brands.

Much of WD-40’s competition comes from the DOW Chemical Co. (NYSE:DOW) and E.I. du Pont Nemours and Co. (NYSE:DD). Another to know is the Church and Dwight Co. (NYSE:CHD). If you own one of these competitors you probably want to learn about WD-40. While DOW Chemical and E.I. du Pont Nemours and company each have similar business models to WD-40, they also have unique differences. Perhaps the one big thing to note is that DOW Chemical trades at 13 times earnings, E.I. du Pont Nemours and company at 20 times earnings, Church and Dwight at 24 times earnings and WD-40 trades at 26 times earnings. However, I do not think that WD-40, despite my love for the products, deserves this premium multiple. I see the stock declining as the quarter was quite weak.

Total net sales for the third quarter were $95.7 million, an increase of 3 percent compared to the prior year fiscal quarter. Year-to-date total net sales were $285.4 million, an increase of 4 percent from the prior year fiscal period. One thing to note is that changes in foreign currency exchange rates had a favorable impact on sales for both the current quarter and year-to-date. On a constant currency basis total net sales were $93.2 million for the third quarter and $283.8 million year-to-date.

What matters to many is net income. Net income for the third quarter was $10.4 million, an increase of 1 percent compared to the prior year fiscal quarter. Year-to-date net income was $32.2 million, an increase of 2 percent from the prior year fiscal period. This led to diluted earnings per share of $0.69 in the third quarter, compared to $0.66 per share for the prior year fiscal quarter. Year-to-date diluted earnings per share were $2.10 compared to $2.01 in the prior year fiscal period. Further Gross margin was 51.4 percent in the third quarter compared to 51.3 percent in the prior year fiscal quarter. Year-to-date, gross margin was 51.6 percent, compared to 50.8 percent in the prior year fiscal period.

One red flag is that selling, general and administrative expenses were way up. They rose 5 percent in the third quarter to $26.9 million and also were up 7 percent year-to-date to $80.2 million when compared to the prior fiscal year periods. This could be explained by more advertising and such, however, advertising and sales promotion expenses were down 3 percent in the third quarter to $6.5 million compared to prior year. All in all, with a premium multiple, WD-40 is priced to perform much stronger than this. Here is what Garry Ridge, WD-40 company’s president and chief executive officer, had to say:

“We are pleased with the solid progress we have made for the year and remain confident that our strategic initiatives are well positioned to carry us into the future. While we continue to see fluctuations in certain markets quarter to quarter, our long-term growth plans remain stable and we continue to deliver on our expectations.”

So what are those expectations? Well they aren’t stellar. WD-40 has guided at the midpoint of its original guidance for earning and is projecting sales to be below prior guidance. Net sales growth is projected to be between 3 and 5 percent with net sales expected to be between $380 million and $387 million. This is a big disappointment as the Street was expecting around $400 million. Gross margin for the full year is expected to be close to 51.5 percent, which is OK but lacks expansion. Projected advertising and promotion expenses of 6.0 percent to 7.0 percent of net sales, which hurts net income. Net income is projected to be between $41 million and $43 million. Expect diluted earnings per share to be between $2.70 and $2.83, right at the midpoint of guidance.

To me, the stock is a bit rusty. It is too expensive and not delivering results to justify the multiple. My sentiment is to sell the stock and revisit it when growth resumes or shares dip to around $58.

Disclosure: Christopher F. Davis holds no position in WD-40 or any other stock mentioned in the article and has no plans to initiate a position in the next 72 hours. He has a sell rating on the stock and a price target of $58.

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