5 Takeaways From WD-40's Earnings Announcement

Summary

• WD-40’s flagship multi-purpose petroleum lubricant served as a catalyst for revenue expansion.
• Robust revenue expansion in the Asia-Pacific region was offset by revenue declines in its EMEA region.
• WD-40 sports a rock solid balance sheet that should help it get through any rough patches.

On Jan. 7, multipurpose and household cleaner company WD-40 (NASDAQ: NASDAQ:WDFC) came out with its Q1 FY 2015 earnings announcement. WD-40 could have done better. However, there are some bright spots worth noting. Let's take a look and see what is going on with this company.

Revenue increased slightly

In the most recent quarter, WD-40's overall revenue expanded 0.85% year-over-year. WD-40's famous multi-purpose products contributed to the entire overall gain in revenue (see table below). The Americas region grew its revenue 2% year-over-year. Latin Americans are heavily adopting the useful product which overcame softness in more developed regions. Sales in the United States remained constant according to the earnings announcement. WD-40 could have run some promotions coupled with cost control measures to cover marketing costs to entice more customer purchases in that region as well. In Canada, WD-40 saw decreased sales due to "changes in distribution and the timing of customer specific promotions" which means the challenges in the region could be temporary.

Also, within the Europe, Middle East, Africa and Indian regions (EMEA), WD-40 saw demand decline when promotional activity was lifted. Moreover, adverse currency translations served as a headwind in this region. Robust growth in the Asia-Pacific essentially served as an offset against revenue declines in that region.

WD-40 Q1 FY 2015 Sales by Product (In Thousands)
Product	11/30/2014	11/30/2013	Gain	% Change
Multi-purpose maintenance products	$84,904	$83,986	$918	1%
Homecare and cleaning products	$11,449	$11,555	-$106	-1%
Total	$96,353	$95,541	$812	1%
WD-40 Q1 FY 2015 Sales by Geography (In Thousands)
Geographic region	11/30/2014	11/30/2013	Gain	% Change
Americas	$44,773	$44,062	$711	2%
EMEA	$34,591	$36,516	-$1,925	-5%
Asia-Pacific	$16,989	$14,963	$2,026	14%
Total	$96,353	$95,541	$812	1%

Click to enlarge

Source: Company earnings announcement

Net income declined

While WD-40's revenue barely gained, its quarterly operating expenses expanded 4% contributing to a 6% decline in net income vs. the same time last year. WD-40 faces market saturation in more developed regions which means that part of the profitability expansion needs to come from overall cost control.

Free cash flow expanded

WD-40's free cash flow expanded 41% vs. the same time last year. Favorable changes in assets and liabilities contributed to this vast increase in free cash flow, especially in the other assets and inventory category. Operating cash flow expanded 40% easily overcoming the 33% increase in capital expenditures.

Balance Sheet is excellent

WD-40 possesses an excellent balance sheet which is a rarity. WD-40's $89 million in cash and short-term investments equates to a whopping 56% of stockholder's equity. I like to see companies maintain a cash and short-term investments balance equating to more than 20% of stockholder's equity to get them through rough times. WD-40 possesses no long-term debt which means it doesn't further constrict net income and free cash flow with interest cost.

Dividend

WD-40 pays a dividend. The best way to gauge dividend sustainability is to compare how much a company pays out in dividends vs. its free cash flow. In the most recent quarter, WD-40 paid out 63% of its free cash flow in dividends. In FY 2014, WD-40 paid out 61% of its free cash flow in dividends. I like to see companies pay out 50% or less of their free cash flow in dividends and retain the rest for reinvestment back into the business. Currently, the company pays its shareholders $1.52 per share per year and yields 1.8%.

Looking ahead

WD-40 is a good company that sells a pragmatic and needed product. The company has given its shareholders a total return of 22% vs. 7% for the S&P 500 since I first wrote about it in August (chart below).

WDFC Total Return Price data by YCharts

Currently, the company trades at a P/E ratio of 30 vs. 19 for the S&P 500 and 23 for the company's five-year average making it vastly overvalued. Investors may want to wait for a correction before buying.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.