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WD-40 Greases a Few Squeaky Wheels (WDFC)
Harley-Davidson (HOG) motorcycles aside, is there any product that has a greater cult following than the ubiquitous WD-40, the lead offering of the WD-40 Company (WDFC)?
Heck, WD-40 even has its own fan club.
Most people know the WD-40 Company for its blue-and-yellow cans of WD-40, and for most of the company's 54-year history it has been a one-trick pony.
But that began to change in 1995 when management added 3-IN-ONE oil to the fold.
Then in 1999, it went on full-fledged acquisition spree, adding Lava soap, 2000 Flushes, Carpet Fresh, X-14, and Spot Shot.
The acquisitions helped boost annual revenue from $175 million in 2001 to $287 million in 2006.
Recent performance, though, has lagged the longer-term trend.
In January, WD-40 reported first quarter 2007 EPS of $0.33, a dime short of the consensus estimate of $0.43 and 24% less than the same year-ago period.
Meanwhile, revenues rose 7.1% year-over-year to $72 million, but fell short of the $73 million consensus estimate.
So what's going one?
Administrative expenses rose to $19.1 million from $16.4 million while marketing expenses jumped to $5.6 million from $3.3 million.
Much of the increase is associated with the start-up of direct operations in China, which are expected to be fully online by March. But don't expect any dividends soon -- management expects the China investment to reduce net income by $1 million, or six cents per share, through 2007.
Longer-term, China will pay dividends; at least if management's fiscal 2010 goals carry any validity. Over the next four years, management expects to increase total revenues to the $375 - $407 million range, increase net income to the $40.1 - $43.6 million range, and increase EPS to the $2.30 - $2.50 range.
Not surprisingly, lubricants are expected to provide most of the gain. By 2010, that segment is expected to post revenue from $255 - $275 million, household products are expected to post revenue from $113 - $123 million, while hand cleaners are expected to post revenue of $7 - $9 million.
Tacking on another $100 - $125 million in sales is a lofty goal, to be sure, especially if no acquisitions are in the cards.
As well, the firm's competition is stiff and big. Six companies comprise nearly 100% of the total market cap for the household products industry. And the top three -- Proctor &Gamble (PG), Kimberly Clark (KMB), and Colgate-Palmolive (CL) -- account for the majority of the total market cap.
That's said, WD-40 does an admirable job of holding its own against these giants. In fact, its products tend to be market leaders.
The company created the spray lubricant market and is the number one brand in that market, with an 80% share, and its Spot Shot, 3-IN-ONE, 2000 Flushes and Carpet Fresh brands are leaders in their respective niches as well.
But let's be honest: The household products industry is a mature, slow growth industry with defensive performance characteristics. WD-40 won't make any Google-like (GOOG) rises on its own (a buyout is another story), but it probably won't make any Enron-like flops either.
WD-40 is what it is -- a safe, stable company with a low debt-to-equity ratio that generates gobs of operating cash flow.
In fact, in the latest quarter, cash from operations increased more than 15% to $14.3 million, easily financing the quarterly dividend obligation of $3.7 million, which was recently increased 14% to $0.25 per share.
If management meets its stated objectives, investors should expect more dividend increases and continued, albeit unspectacular, price appreciation in the future.
But unspectacular isn't necessarily bad. After all, doesn't slow and steady usually win the race?
Heck, WD-40 even has its own fan club.
Most people know the WD-40 Company for its blue-and-yellow cans of WD-40, and for most of the company's 54-year history it has been a one-trick pony.
But that began to change in 1995 when management added 3-IN-ONE oil to the fold.
Then in 1999, it went on full-fledged acquisition spree, adding Lava soap, 2000 Flushes, Carpet Fresh, X-14, and Spot Shot.
The acquisitions helped boost annual revenue from $175 million in 2001 to $287 million in 2006.
Recent performance, though, has lagged the longer-term trend.
In January, WD-40 reported first quarter 2007 EPS of $0.33, a dime short of the consensus estimate of $0.43 and 24% less than the same year-ago period.
Meanwhile, revenues rose 7.1% year-over-year to $72 million, but fell short of the $73 million consensus estimate.
So what's going one?
Administrative expenses rose to $19.1 million from $16.4 million while marketing expenses jumped to $5.6 million from $3.3 million.
Longer-term, China will pay dividends; at least if management's fiscal 2010 goals carry any validity. Over the next four years, management expects to increase total revenues to the $375 - $407 million range, increase net income to the $40.1 - $43.6 million range, and increase EPS to the $2.30 - $2.50 range.
Not surprisingly, lubricants are expected to provide most of the gain. By 2010, that segment is expected to post revenue from $255 - $275 million, household products are expected to post revenue from $113 - $123 million, while hand cleaners are expected to post revenue of $7 - $9 million.
Tacking on another $100 - $125 million in sales is a lofty goal, to be sure, especially if no acquisitions are in the cards.
As well, the firm's competition is stiff and big. Six companies comprise nearly 100% of the total market cap for the household products industry. And the top three -- Proctor &Gamble (PG), Kimberly Clark (KMB), and Colgate-Palmolive (CL) -- account for the majority of the total market cap.
That's said, WD-40 does an admirable job of holding its own against these giants. In fact, its products tend to be market leaders.
The company created the spray lubricant market and is the number one brand in that market, with an 80% share, and its Spot Shot, 3-IN-ONE, 2000 Flushes and Carpet Fresh brands are leaders in their respective niches as well.
But let's be honest: The household products industry is a mature, slow growth industry with defensive performance characteristics. WD-40 won't make any Google-like (GOOG) rises on its own (a buyout is another story), but it probably won't make any Enron-like flops either.
WD-40 is what it is -- a safe, stable company with a low debt-to-equity ratio that generates gobs of operating cash flow.
In fact, in the latest quarter, cash from operations increased more than 15% to $14.3 million, easily financing the quarterly dividend obligation of $3.7 million, which was recently increased 14% to $0.25 per share.
If management meets its stated objectives, investors should expect more dividend increases and continued, albeit unspectacular, price appreciation in the future.
But unspectacular isn't necessarily bad. After all, doesn't slow and steady usually win the race?
by
Stephen Brown
Stephen P. Brown is a Chartered Financial Analyst, former equity analyst, investor, and freelance financial writer living in Brighton, Colorado. His work has been published in Barron's, CFA Magazine, Wealth Manager Magazine and The Denver Post.
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