WD-40: Classic Small-Cap Growth Company Still Overvalued

The iconic lubricant company has a very high market share position, which may limit growth

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Jun 21, 2022
Summary
  • WD-40 provides lubricant, maintenance and cleaning products under brands such as WD-40, Spot Shot, Carpet Fresh and Lava.
  • The company has a long track record of solid growth and innovation.
  • WD-40 appears to be overvalued on most valuation metrics.
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I would guess almost everyone in North America has used WD-40 lubricant at some point in their lives, but very few people understand the company or stock behind the product. WD-40 Co. (

WDFC, Financial) develops and sells maintenance products, homecare and cleaning products on a global basis.

The company provides multi-purpose maintenance products that include aerosol sprays, non-aerosol trigger sprays and liquid-bulk form products under the WD-40 Multi-Use brand name. The name also covers the WD-40 Specialist brand, which includes specialty maintenance products such as penetrants, degreasers, corrosion inhibitors, greases, lubricants and rust removers.

The brands origin stands for Water Displacement and the current product was believed to be the 40th attempt at creating the right formula. The spray, which is composed of various hydrocarbons, was originally designed to be used by Convair to protect the outer skin of the Atlas missile from rust and corrosion.

Other brands marketed by the company include 2000 Flushes, Spot Shot, Carpet Fresh, 1001 and Lava soap. The company was founded in 1953, went public in 1973 and currently has a $2.5 billion market capitalization.

Financial review

The company’s fiscal year ends in August. For the year ending August 2021, revenue increased 19.5% as the company rebounded from a difficult 2020, which was negatively affected by the Covid-19 pandemic. Operating income increased 15% and earnings per share increased 15.7% compared to the prior-year period.

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For the year, maintenance products increased 21% while cleaning supplies only rose 1% due to difficult comparisons. The maintenance products segment represents approximately 90% of total company sales. Continued strong growth was evident in the second quarter ending February 2022, with revenue increasing 16% and net income growing 13%.

The company maintains a strong balance sheet with cash and equivalents of $43.3 million and total debt of $114.9 million as of the most recent quarter. With expected Ebitda of $100 million or more, the company’s leverage ratio of very low and the debt is manageable.

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In 2021, the company approved a share repurchase plan that became effective on Nov. 1. Under the plan, the company may acquire up to $75 million of its outstanding common shares through 2023. During the period from November 2021 through February 2022, WD-40 purchased 78,637 shares of common stock worth $18.2 million, which leaves $56.8 million available remaining.

Valuation

The company recently issued guidance, which calls for net sales growth between 7% and 12%, gross margins of approximately 50.5% and diluted earnings per share between $5.14 and $5.27. Consensus analyst estimates are near the low end of that range at $5.18 for this year and $6 next year.

That puts WD-40 stock trading at 35 times current year earnings and 31 times next year's earnings. Although the company has a long track record of solid growth, that seems excessive. According to the GuruFocus 30-year financial history data, the company has grown earnings per share at an annualized rate of 9.2% over the past 10 years.

The company has a long-term goal of generating between $650 million and $700 million in revenue by 2025, with the highest growth rates occurring in the Asia Pacific region.

Utilizing the GuruFocus DCF calculation, the company appears to be overvalued. Using forward earnings per share estimates of $6 as the starting point and giving it a generous 15% long-term growth rate, the value comes out to approximately $150, or 21% below today's price.

The company pays a $3.12 annualized dividend, which because of the company’s elevated stock price, only provides a dividend yield of 1.72%. In addition, the payout ratio is over 50%.

Guru trades

One guru who has purchased shares of WD-40 recently is

Ray Dalio (Trades, Portfolio). Gurus who have recently sold or reduced positions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Joel Greenblatt (Trades, Portfolio).

Conclusion

WD-40 is a well-managed and quality small-cap growth company that appears to be overvalued at this time. The current very high market share position in American households may leave little room for growth and the company will have to rely on international markets to generate double-digit growth.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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