WD-40: Abandon Ship?

| About: WD-40 Company (WDFC)


I have had a long-term hold rating on WD-40.

Q1 earnings are out and the stock is set to be hit hard.

I discuss the critical metrics and the outlook for the name.

The WD-40 Company (NASDAQ:WDFC) is one of my favorite household names. As a stock, I have called it a buy-and-hold success story, and one that may be exactly what you are looking for. As long as products require maintenance and lubrication, the company will always have a market for its flagship multi-purpose maintenance products under the WD-40 brand. However, over the last year, there have been quarters that were certainly weaker than I would like. Still it is delivering returns. That said, in some of these quarters, when we dug deeper, we saw that this was just noise. However, back in April, I questioned if it was time to get out, but said to keep buying. Since then, the stock is up another 10%. However, it looks like the volatility is set to return after the stock ran up well over $120, as the just released Q1 results are less than stellar.

Let's get right to it. The stock will be shellacked today. The headline numbers show a pretty bad revenue miss, and a worse than expected bottom-line whiff. This broke the trend of the company missing revenues but beating earnings. So what is the deal here with the revenue miss? Well, once again sales for the quarter were impacted by currency issues. On an absolute basis, sales for the fourth quarter were $89.2 million, down 4% year over year. It missed, however, estimates by $7.1 million. While this hurts, I want to point out that if we look at the sales on a constant-dollar basis, net sales for the quarter would have been $95.1 million for the quarter. That is up 3% on a constant-dollar basis.

How about the earnings picture? Here things have generally looked strong as earnings have been beating analysts' estimates, but are they rising? But not this quarter. Net income was $11.8 million, down 3% compared to last year's quarter and earnings per share came in at $0.32, fanning on estimates by a rather large $0.05. This is a poor year-over-year decrease and I am truly surprised at this quarter's underperformance on the headline numbers. So what is going on?

The fact is that this is a global company and is subject to volatility, particularly with its exposure to foreign currency. Sales were down in all regions except Asia Pacific. Sales in the Americas fell due to lower maintenance product sales, though the year ago quarter was bolstered by new product launches. Latin American sales were lower thanks to uncertainty in Mexico. Most of the falling sales in Europe we a result of currency. In constant dollars sales were up 13%. In Asia Pacific, new promotional activity and new distribution programs drove sales higher. But the best news the company has been delivering this year and one of the keys to this company I cited when I first highlighted it is of course its strong margins. I continue to see the company effectively reducing its input costs while managing price increases. Well, this has been the pattern the company has followed. Gross margin widened once again in Q1 to a stellar 57.2%. I don't see how it can get much better. This is up from 55.6%. The margins are excellent, and you need to be aware of this. Gross margin expansion like this for such an established company is impressive. This increase in margins came despite an increase in expenses. Garry Ridge, president and CEO, stated:

"As a global company that generates nearly 40 percent of its sales in currencies other than the U.S. dollar, foreign currency exchange headwinds continue to have an impact on our reported results. Even though the global nature of our business exposes us to some currency risk, our geographically diversified business also acts as a natural hedge which can cushion us from the impact of localized events. At any given time, depending on what is going on in a particular region, some of our markets will over perform while others may underperform. While we expect we will continue to see fluctuations in the performance of certain markets quarter to quarter, our long-term growth plans remain unchanged."

Once again, this is realistic commentary. We see here the company recognizes that currency issues are real, with 40% plus of sales coming in different currencies. The strength of the dollar is a real threat to domestic companies doing a lot of business overseas. That said, the company still continues to try and contain costs and focus on improvement. This was not the best quarter. But we have to take it in stride and let the stock pull back. The stock is pricy thanks to its recent run well over $100, then $110 and $120. Sales/earnings have not kept pace with this growth, pricing the stock for perfection.

AS we look forward, of course we want to beat estimates. But this is a long-term name. There will be ups and downs. Keep in mind that the company is incredibly shareholder friendly. It has a nice share repurchase plan. Recall it had been authorized to buy up to $75.0 million of its outstanding shares through August 31, 2016. On June 21, 2016, the board of directors approved a new share repurchase plan. That new plan became effective as of September 1, 2016. Under the new plan, management is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2018. On top of that, the company has hiked its dividend by 16.7%. The new dividend of $0.49 is payable January 31, 2017, with an ex-dividend date of January 18th. That is strong and exactly what I am looking for when recommending a long-term slow grower. I maintain a hold rating.

Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "Follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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