WD-40 Company (Nasdaq:WDFC) got its start in 1953 in a small San Diego shop where three employees took 40 tries to develop a rust prevention solvent. They called it WD-40. The WD stood for water displacement and the 40 for the number of attempts it took to develop the perfect formula. The same one is in use today. It was so popular that by 1993, WD-40 found that it was in four out of five American households. How's that for market penetration?

Not satisfied, the company decided it could do more than offer a great stand-alone product. In 1998, it began transforming itself from a one-brand company to that of a global business. It's a work in progress. When started in 1998, total sales were $138 million and 44% came from outside the U.S. Fast-forward to 2007, and net sales are $308 million and 58% are outside the U.S.

The Money is in the Name
In addition to growing the business internationally, management has chosen to run the company with an asset light strategy, preferring to outsource both the manufacturing and distribution, allowing it to focus on sales, marketing and new product development. The same strategy worked quite well for Nike (NYSE:NKE) and Timberland (NYSE:TBL).

A direct result of this plan is that it's spent only $3 million in capital expenditures in each of the last five fiscal years. In 2007, it spent $2.6 million, yet generated $51.8 million in EBITDA. For every five cents WD-40 spends on capital, it makes $1 in EBITDA. That's very lean. Hey, if it can work for a shoe company, it can work for a "squeak, smell and dirt business". (For more on outsourcing, read The Globalization Debate.)

To Buy Or Not To Buy?
Opinions vary right now about WD-40. In mid-June, JPMorgan Chase downgraded the stock to 'underweight' from 'neutral' citing commodity cost pressures and a reasonably good run in the first half of the year compared to some of its competitors.

Oppenheimer & Co. initiated coverage on July 1 at "perform" which means they expect the stock to match the performance of the S&P 500 within 12 to 18 months. Then Barron's suggested on July 2 that investors were selling the stock before the Q3 earnings release due to weakening business conditions. Barron's reckons the company is in for more pain due to home improvement stocks slumping and point to its stock down 25% from recent 52-week highs. Overall, the professionals aren't very enthusiastic.

Fit As A Fiddle
In the third quarter earnings report, company guidance called for full-year sales up 4-8%, to between $320 million and $332 million. Net income would be $30-$31.2 million, which equates to EPS of $1.78-1.85.

Analysts from Thompson Financial, on the other hand, are expecting a profit of $1.86 for the full-year and sales of $325.1 million. The company is likely to fall short of EPS and be in-line with sales. Its stock will probably fall some more once the fourth quarter announcement comes out. However, once this happens it should provide a good buying opportunity for long-term investors.

The company predicts sales growth in the next five years between 6.7% and 8.7% annually with EPS growth between 9.4% and 11.5%. Add to this new products were responsible for $134 million in sales the past three fiscal years and the return on invested capital was up 300 basis points in fiscal 2007 to 20.1% from 17.1% a year prior, and you have a product innovation pipeline that is churning out profitable add-ons to its existing business. It's easy to want this; it's harder to execute. (Explore forward looking expectations in Can Earnings Guidance Accurately Predict The Future? and Earnings Forecasts: A Primer.)

Bottom Line
WD-40 is a lot like Tootsie Roll Industries (NYSE:TR) in that the main product has become the face of the business. Five years from now, you probably won't recognize the company. Whether the stock price is in the stratosphere will depend on people's willingness to let go of the past. Until then, you could take advantage of the $1.00 annual dividend that it is currently yielding 3.5%.



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Tickers in this Article: WDFC, NKE, TBL, TR

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