WD-40 Stock: Still Expensive (NASDAQ: WDFC)
WD-40 Company (NASDAQ: WDFC) just reported lackluster third-quarter results and the stock is trading up more than 10% today. Is it now a good deal?
My analysis below indicates that the answer is a solid no. I think investors should always steer clear of WD-40 because it is still trading at too high a valuation.
Introduction to WD-40
The WD-40 houses the iconic WD-40 multi-purpose product; lubricant, rust protector, cleaner, degreaser, etc. For the first 40 years, WD-40 Company sold only one product. Then, starting in the 1990s, the company diversified and began to acquire additional brands and products such as the 3 in 1 all-purpose lubricant, Solvol powerful hand cleanser and Spot-Shot carpet cleaner.
WD-40 is a fantastic company
From the financial statements, we can see that WD-40 is a fantastic company. Revenues have grown at a CAGR of 6.1% since 1985, although growth has been slower in recent years, reaching just 3.8% CAGR over the past decade. The gross margin is on average 54% and is very stable (Figure 1).
Earnings and operating margins are also fantastic, with operating margins averaging 21.5%, even during recessions and pandemics, WD-40 hasn’t missed a beat (Figure 2).
This has led to exceptional ROE and EPS performance, with compound EPS at a CAGR of 6% since 1985 (Figure 3).
What’s not to like? Evaluation
We’ve established that WD-40 is a fantastic little company that consistently generates profit regardless of the environment. So what’s the problem ?
The problem is that this fantastic company is more than priced in, with the stock trading at a P/E of 46x, more than double the industry average of 19x. WD-40 is trading at 14x P/B, which means that even though it generates a 35% ROE like in 2021, your investment dollar only returns $0.025, even worse than 1 treasuries. year that yield more than 3%! (Figure 4)
WD-40 is a classic case of a fantastic company trading at a not-so-fantastic price.
Concerns over the latest quarterly highlights
WD-40 just released its Q3/22 results yesterday, and the results highlight that the company is priced perfectly.
Sales fell 9% year-over-year to $124 million and EPS was $1.07, missing consensus estimates by $0.20. More importantly, gross margins contracted 540 basis points year-over-year to 47.7%. If this persists, it will be the lowest gross margin since the Great Financial Crisis of 2008, when gross margin was 46.8%. The main issue was soaring input cost inflation, a common theme that we believe will affect all businesses in 2022.
We are confident that the company will increase its prices strategically and eventually the company will regain the average gross margin level of 54%. However, the reaction of equities shows how little valuation support there is at 14x P/B and 46x P/E.
While WD-40 is a fantastic company that generates profits in all market environments, investors have driven the stock to ludicrous valuation levels that are subject to the slightest hitch, like these latest Q3/22 results. Although stocks are down more than 10%, we believe they are still significantly overvalued and advise investors to stay away.