Daniel Grizzell
this WD-40 Company (NASDAQ:WDFC) stock is a long-term name that we continue to hold and is one of our longest-held positions.In our last update, we continued to believe the stock was expensive to own based on valuation metrics. However, the stock has been “overvalued” by many of these metrics. Despite all the volatility in the market, the stock has remained within a tight range over the past few months.
What we have here is a name that is growing very slowly, but delivering slow and steady long-term returns. We think of it as “Old Faithful” for a reason. Over the course of these long-term gains, we’ve seen dividends continue to be paid and raised again and again. It’s such a great name to have. If we see the share price pull back around 10%, we suggest new money may come on board.we may need a Market fluctuations can cause this to happen.
The company just reported its second-quarter earnings, and nothing we saw in the results changed our long-term hold. Let’s discuss it.
Revenue continues to grow
WD-40 Company sales continue to grow slowly. It enjoys sustained demand, and internationally the company has greater scope to expand its geographical footprint. The company also enjoys pricing power over its products.
In the second fiscal quarter, WDFC’s sales were US$139.1 million, an increase of 7% over last year. We expected sales of about $140 million, so that was actually a little bit different than what we expected. This also beat consensus by $1.15 million. We were expecting revenue to grow in the high single digits, and while sales were down slightly, they were largely in line with expectations. There’s nothing to worry about here. Once again we’re seeing growth in all regions. Overall, net sales by region in the second fiscal quarter were 46% in the Americas, 39% in Europe, the Middle East and Africa, and 15% in Asia Pacific.
Regional Breakdown – Americas sales flat, but international sales strong
Sales in the Americas grew only 1%. Net sales of WD-40 Multi-Purpose Products increased $0.6 million, or 1%. That said, we saw increases of $1.1 million and $0.7 million in Latin America and the United States, respectively, or 12% and 2%.
As for EIMEA, sales growth continued to be strong, up 16%, which was the result of the company’s price increases and promotions. We saw the strength of France, India and Iberia. Professional products in the region also grew by 23%, and multi-purpose products by 17%. But pricing is only part of the equation, sales are also increasing.
Sales in the Asia-Pacific region have been mixed over the past few quarters due to instability in the Asian distributor market. Net sales increased 4% over last year as the Asian distributor market grew 7%. It is also worth noting that the Australian market saw a 23% increase in home care and cleaning products. Overall multi-purpose products in the region grew 3%, while professional product sales were flat.
Margin capacity
As a reminder, WD-40 Company’s long-term gross margin target is 55%. WD-40’s marginal capabilities have steadily increased recently. Gross profit margin in the second fiscal quarter was 52.4%, compared with 50.8% in the same period last year. This growth is again the result of rising pricing and cost-cutting by management. This includes WD-40 acquiring its Brazilian distributor. We also learned in the press release that WD-40 will sell its lower-margin home care and cleaning products in the U.S. and U.K., which should boost margins. The company is getting closer to its long-term goals.
General expense work was beneficial, but selling, general and administrative expenses increased 10% in the quarter. We would like to see better cost control there. However, ad spending is up 31% from last year, so the company is buying some of its own sales to some extent.
Despite improved margins, lower-than-expected sales and a 21% increase in advertising spending caused net income to fall to $15.5 million, down 6% from the previous quarter. However, so far this year, net profit has increased by 8%. Earnings per share fell to $1.14 from $1.21 a year ago, which was actually in line with our forecast but missed the consensus by $0.02.
front view
Dormitories come and go. It wasn’t the best quarter for WD-40, but it wasn’t exactly a failure either. The company is buying back stock and continuing to increase its dividend.
As we look ahead to fiscal 2024, the company reiterated most of its outlook and made some improvements to its outlook. Although earnings per share were down from last year, earnings per share increased this fiscal year. While the company expects net sales to grow 6-12%, we think growth of 8-11% is more likely. Margins increased from 51.0% on the low end to 51.5% to 53%. You expect net income to be $67.7 million and $71.8 million, up from $65 million to $70 million when we last reported. Earnings per share got another boost.
Previously, earnings per share were $4.78 and $5.15. The price per share rose to $5.00 to $5.30. Oh, and this compares to our last updated earnings per share outlook of $4.95 to $5.25, so expectations are now more consistent with our prior forecast.
At the mid-point, this represents an increase of approximately 4% from the previous fiscal year. So while the WD-40 company continues to grow year over year… valuation. At $250 per share, that’s almost 50 times FWD’s earnings. That’s expensive. However, if WDFC shares fall to the $225-$230 level, we think new money could consider buying. This report suggests that the stock price may move slightly on news of business line sales and outlook revisions.
