Larger Rivals Outcompeting WD-40

By Ryan C. Fuhrmann | June 30, 2011 AAA

WD-40 (Nasdaq:WDFC) is a small capitalization consumer goods firm. Its smaller sales base and global focus are ideal conditions to post above-average growth trends, but this has not been the case in recent years. A number of larger rivals have managed to outgrow WD-40 and currently trade at lower earnings multiples, though WD-40 continues to hold growth potential.
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Third Quarter Recap

Net sales rose 4% to reach $85.5 million. Sales from the company's multi-purpose maintenance product unit made up 85% of the total top line, and it improved 7% on strong sales growth from the namesake WD-40 lubricant as well as the 3-IN-ONE and Blue Works brands. Homecare and cleaning product sales continued to lag, falling 12% to make up the rest of sales. Brands in the second segment include 2000 Flushes and Carpet Fresh. By region, sales in the Americas fell 1% and accounted for 54% of total sales. European sales increased 4% to make up 33% of the total, while Asian sales jumped 23% but only accounted for 13% of total sales.

Higher product costs sent gross profits down 0.3% to $42.1 million. Operating expenses rose 3.7% and pushed operating income down 9.2% to $11.8 million, though this still represented a healthy operating margin of nearly 14%. Higher income tax expense and lower interest income sent net income down even further as it fell 11.6% to $8.1 million. Higher shares outstanding sent diluted EPS down 13% to 47 cents per share. This came in below analyst projections.

Outlook

Despite the tougher third quarter, management still expects full-year sales between $330 million and $340 million, and earnings in a range of $34.9 million and $36.6 million, or between $2.05 and $2.15 per share.

Bottom Line

Based on the current share price, WD-40's forward P/E is nearly 19 and appears rather lofty for a firm that has only managed to grow profits just over 5% annually over the past five years. Sales growth has been even lower over this time period, averaging just over 4%.

In the quarterly earnings news release, management boasted that 60% of sales now resides outside of the U.S. Exposure to faster-growing parts of the world should boost future growth trends, but near-term rises in commodity costs are denting current profitability. Given WD-40's small size, it should be able to outgrow consumer giant rivals that include Procter & Gamble (NYSE:PG), Unilever (NYSE:UN) (NYSE:UL) and Kimberly-Clark (NYSE:KMB), but over the past five years these larger firms have grown faster than WD-40. They also trade at more reasonable forward P/Es in the mid-teens, and they have higher dividend yields. (For related reading, see Using Consumer Spending As A Market Indicator.)

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