2024-01-11 12:38:48 ET
Summary
- WD-40 Company's stock remains expensive, but has generated stellar long-term returns and pays a dividend.
- We review the company's fiscal Q1 earnings and see sales for the company have continued to grow, with growth in all regions.
- Margins have improved, with gross margin approaching the long-term target of 55%.
- Enjoy another dividend increase.
Well, we continue to own WD-40 Company ( WDFC ) stock. Shares continue to be expensive by all valuations metrics , but the market continues to value it at these perceived stretched levels. Indeed, a mid- to high-30X FWD earnings multiple is rather rare for a slow-growing name. But over time, this stock has generated stellar long-term returns, and has paid a dividend along the way. It has been a great name to own.
If the stock ever drops with the market significantly, and there are sales in the stock now and again, we will rate shares a buy. But having been invested here as one of the longest holdings our senior analyst has owned, a neutral/hold rating remains best. The forward view is for slow growth, however. We believe the just-reported fiscal Q1 earnings justify this call, and the quarter was strong. In this column, we discuss the recent performance and forward view.
WDFC's Top Line growth continues
The company is continuing to regularly grow sales. In fiscal Q1, sales were $140.2 million, up 12.4% from last year. We were expecting sales of around $136.0 million, so this was actually an upside surprise. This also surpassed consensus by $6.02 million . We were looking for mid single-digit increases in the top line, so double-digit growth was impressive. We saw growth in all regions.
Management at the WD-40 Company has done an excellent job working to grow the business internationally. We still believe there remain many regions of the world that the company can expand into, particularly in emerging markets. Overall, net sales by location for fiscal Q1 were 45% in the Americas, 35% in EIMEA, and 20% in the Asia-Pacific region.
Regional highlights
In the Americas, we usually see over half of the sales for the company, but strength internationally has grown. That said, sales in the Americas increased 10%, driven by much higher sales of maintenance products, and specifically multi-use products. However those sales were driven primarily by price increases, but there were increases in sales volume, specifically in Latin America.
Turning to EIMEA, sales rose a strong 20%, and this was a result of both price increases and promotions put into place by the company. We saw strength in France, the Middle East, and Germany , Austria , and Switzerland (the so-called DACH region) . Sales in France, the Middle East, and the DACH region were up $1.9 million, $1.6 million, and $1.5 million, respectively, from last year.
Asia-Pacific sales have been a challenge, but we saw a strong rebound in fiscal Q4. Net sales rose 6% versus last year due to increases in China and the Asia distributor markets, which increased 8% and 4%, respectively. China saw strength from pricing and promotions, as well as targeted marketing that boosted sale volume.
What about margins?
Margins improved
The WD-40 Company has a long-term 55% gross margin target. However, the company has lagged this target significantly, but has slowly seen improvements in margin power. Gross margin in fiscal Q1 was 53.8% versus 51.4% a year ago. That is strong, and is a result of pricing increases, as well as lots of work by management to cut costs. The company is getting closer and closer to its long-term target. This was above the full-year 51.0% last fiscal year.
The work on general expenses has been beneficial, but selling, general, and administrative expenses were up 10% in the quarter. We would like to see better cost controls there. However, advertising spend was up 31% from last year, so the company is buying some of its own sales to a degree.
Despite the increase in advertising spend, other cost controls have shown a strong benefit, and in conjunction with much better gross margin, we saw net income was $17.5 million, an increase of 25% from the prior year fiscal quarter. Growth like this starts to justify the valuation, but we would be cautious at thinking such earnings growth is sustainable. Generally, we expect long-term EPS growth in the high single-digits. EPS rose to $1.28 from $1.02 a year ago and beat estimates handily. Estimates had EPS growth about flat, something to keep in mind. Overall, it was a stellar quarter.
Looking ahead
Like Old Faithful, WD-40 Company delivered once again as it is growing sales and earnings. Keep in mind there is a nice dividend here as well, and the dividend was raised 6% last month to $0.88 per quarter. The company is buying back shares. As we look to the 2024 fiscal year, the company reiterated its outlook. We thought we might see an increase in guidance after this quarter. While the company sees net sales growth of 6-12%, but we think you see 8-13% as more likely. Margins are expected to be 51 to 53%. You can expect net income of $65 million and $70 million, which will translate to EPS from $4.78 and $5.15.
Now here is the problem, the long term on valuation. If EPS comes in at $4.97, the middle of this guidance, that would be just 3% growth in EPS from last fiscal year. That is problematic for the valuation. However, we see the EPS as coming in at $4.95-$5.25, which is in line with our high single-digit growth expectations long-term. The year is off to a great start, so it will take a weak quarter or two to miss this range. We continue to hold WD-40 Company and enjoy capital appreciation and dividends.
For further details see:
WD-40: Continue To Hold Old Faithful