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A 'Slick' Pick for Total Return *** WD - 40 [NDQ:WDFC]

April 12, 2008 | About:
WD-40 Company: [NDQ:WDFC] April 11, 2008 close: $29.57

52-week range: $28.91 (Apr. 10, 2008) - $42.70 (Dec. 5, 2007)

Yield = 3.38%

WD-40 is the company that makes and markets their flagship product WD-40, found under sinks and in the garages of a remarkably high percentage of all U.S. households. They also own 3-In-One oil, Lava soap, SOLVOL heavy-duty cleanser, X-14, 2000 Flushes and Carpet Fresh.

WDFC shares plunged $3.89 (- 11.62%) last week after the company lowered guidance for the fiscal year ending August 31 to a range of $1.80 - $1.90. The preveious consensus view was for $1.89 - near the high-end of the revised range. Thus, a 4.74% reduction in estimate caused more than twice that much in share price decline.

The closing price of $29.57 is near two-year absolute lows even though the company will be at, or near, its all-time high in terms of sales, cash flow, earnings and dividends even at the reduced numbers.

A quick glance at their 10-year numbers shows their steady progress.

WD-40 Co: Key Ratios*

Ten Year Summary

.............Avg P/E.... Price/ Sales.......Price/ Book.....Net Profit Margin (%) .. B.V. / Sh .........EPS

08/07 .....18.60 ......... 1.95 ...............3.48 .................... 10.2 ................$9.99 ......... $1.83

08/06 .....18.10 ..........2.05 ...............3.79 ......................9.8 ................$9.17 ......... $1.67

08/05 .....17.80.......... 1.84 ...............3.70 .....................10.6 ................$7.79 ......... $1.67

08/04 .....20.90 ..........2.02 ...............4.21 .....................10.6 ................$6.79 ......... $1.50

08/03 .....15.80 ..........2.05 ...............4.64 .....................12.0 ................$6.29 ......... $1.75

08/02 .....16.80 ..........1.96 ...............5.21 .....................11.4 ................$5.06 ......... $1.57

08/01 .....19.00 ..........1.98 ...............5.93 .....................10.3 ................$3.51 ......... $1.08

08/00 .....15.50 ..........2.05 ...............5.66 .....................14.0 ................$3.42 ......... $1.33

08/99 .....18.50 ..........2.62 ...............6.81 .....................15.1 ................$3.60 ......... $1.41

08/98 .....19.90 ..........2.25 ...............5.90 .....................15.2 ................$3.52 ......... $1.40

* source: MSN Moneycentral.com

At today's quote these decent quality shares [Value Line finacial strength rating = B++] now yield a very attractive 3.38% - better than most bank CDs and money market rates.

WD-40 has a good balance sheet. Their treasury cash is almost equal to their total debt. Long-term debt was only 16% of capital as of November, 2007.

Officers and Directors owned 8.3% of the shares as of the latest proxy statement [Nov. 2007.] There were four separate insider buys in January 2008 versus no insider sales. They bought a total of 4900 shares at prices ranging from $32.13 - $32.42. We can now buy cheaper than they did.

What would be a realistic target price for these shares? WDFC's average 10-year mulitple was 18.07x. The lowest price/book value of the past 10 years was 3.48x. Using a slighty lower than average 18 P/E and a calendar year $1.85 estimate leads to a $33.30 year-end goal. At 3.48x last year's book value of $9.99 we can project a $34.76 price by this December. Even a less than typical 1.9x this year's sales would bring WD-40 shares back to about the $38 mark.

The lowest of our target prices would mean a gain of 12.6% from Friday's price. Add in three quarterly dividends of 25 cents each for an expected total return of at least $4.48 or plus 15.15% in under a year.

That may well prove way too conservative, though, based on WD-40's past trading history. These shares have exceeded my low-end target by hitting peak prices of $34.20 -$42.70 at some point in each of the past six years.

The dead low prices in 2006 and 2007 were $30.80 and $29.40 respectively.

With two-year treasuries paying around 1.75% [and without any upside] maybe it's time to consider some shares in this relatively low-risk situation.

After all, Oils well that ends well.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.2/5 (19 votes)

Comments

DaveinHackensack
DaveinHackensack - 6 years ago
How elastic is the demand for WD-40's petroleum-based products? Is the company able to pass along its higher oil costs to customers, or do those higher costs just compress its profit margins? What percent of your stock portfolio have you allocated to this one, Stockdoxc?
batbeer2
Batbeer2 premium member - 6 years ago
At the risk of agreeing with Stockdocx for a change....



I feel WDFC has a coca cola type moat. No it's not coke; yes it's the same type of moat. People are willing to pay more for the product just because of the name. Oil prices will probably impact profit but it will have more impact on competition working with less gross margin.

I think WDFC is well suited for using DCF. DCF gives me a price of $28 after deducting a 25% margin of safety. I would happily allocate 5% of my portfolio to WDFC if it drops to $22. For now it has made my watchlist.


Happy investing to All !
kuuks
Kuuks - 6 years ago
Bruce Greenwald does a great writeup of WDFC in his book "value investing: from graham to buffett and beyond". It is a great company no doubt but I don't think it is undervalued.

Dave I think they are able to pass on higher costs to customers. Think of it this way: the average household will hold one can for a couple years and at a few dollars a can, a price increase has a marginal effect on the wallet. The other customers are mechanics who obviously buy it more regularly but even they won't look for alternatives if the price increases. The demand for WD40 is quite inelastic. As for competition, WD40 has a massive market share and as Greenwald points out, a company with massive resources could probably push them out but it wouldn't be profitable for such a small market with very slow growth.
tkervin
Tkervin - 6 years ago
A note on the bulk users. Most small metal shops buy gallon sizes or spray cans. Typically the way a shop switches to another product is if that product is being "pushed" by their fastener/tool/welding equipment supplier. Think Fastenal or the smaller local supply house. Otherwise the price is low enough to fly under the radar...........WDFC is very near my buy price. I would use 15x the low $1.90 estimate or $28.50.
tkervin
Tkervin - 6 years ago
I need to amend my last post. 15x the $1.80 revised eps estimate or $27......:-)
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
If you caught the exact to-the-penny low in 2004 - 2005 - 2006 and 2007 you would have paid 16.3x, 15.6x, 15.6x and 17x those periods 12-months actual full-year earnings.

If you waited to buy at 15x you would not have been able to purchase these shares at anytime since their low point in March of 2003.

You would have missed these moves:

(not including dividends)

Year / Low ........ Following Year's High .... % Gain

2004 / $24.50 ............. $34.20 ...........39.59%

2005 / $25.00 ............. $37.60 ...........50.40%

2006 / $26.00 ............. $42.70 ...........64.23%

2007 / $30.80 ............. $38.10 ...........23.70%*

* 2008 high through April 11th.

Waiting for something that isn't likely to happen can keep you from making a sound investment. Why not take a half position now and buy more if the shares do go down further?
tkervin
Tkervin - 6 years ago
Normally I would agree. However there are now more stocks selling at low historic multiples than in the last few years. A wider playing field to chose from so I am more selective. If we are not at a market bottom, (and I am agnostic on that score), there are more multi-year multiple lows to come as the market's decline continues. With some exceptions, I limit myself to one or two companies per sector (tech, industrials, etc.), so the bar for purchase is set fairly high. Just waiting for a very fat pitch......:-) An added note: I do scale into positions, most importantly in falling markets......very good advice.
tkervin
Tkervin - 6 years ago
Another note........I have a tendency to be a buy and hold investor. So the chart detailing the yearly potential gains if you bought at the low and sold at the high each year would not apply to me. (Or to most others unless they were very fortunate). A more likely, (and still fortunate because you would have to have bought at an absolute yearly low), outcome would be to buy at the low in 2004 of $24.50 and still be a holder now at $29.57. An investor buying at average 2004 price would be at break even or so at this point. You would have had your dividend income of course which would have covered your loss to inflation.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Anyone who didn't sell this when it hit almost $43 late in 2007 just wasn't paying attention.

It was then over 23x projected earnings and yielding only 2.06%.

You get great trading opportunities on what looks like a staid stock, virtually every year, if you buy at good valuations. That would be true even if you don't hit the exact lows and highs.

In a time when fixed income rates are extremely low this stock is a great, rather conservative, holding with decent upside.

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