Key points
- WD-40 Company is a multi-faceted investment thesis focused on growth and operational quality.
- Second quarter results are solid, with cash flow enabling liquidity creation, reinvestment and capital returns.
- The stock price is down more than 3%, but investors are buying the dip.
- 5 titles we like more than WD-40
WD-40 Company NASDAQ:WDFC is a multifaceted investment thesis focused on growth and operational quality. The company has worked hard to reinvigorate growth and improve margins and took another significant step forward in the second quarter. The company not only improved operational quality compared to last year, but also announced the sale of the harvest segment, which represents a bonus in terms of liquidity, balance sheet, growth and margin.
The collection segment is a portfolio of cleaning products sold in the United States and Europe. The segment makes up a small portion of revenue and is a solid cash generator, but is not the core of the business. Due to competition and the company’s focus on its core business, crop sales fell 3% in the second quarter. The sale has yet to be finalized; the company is in the early stages of the process, but will eliminate barriers to revenue growth while improving net margin and providing additional capital for reinvestment and capital returns.
What this means for guidance is good news for investors. The company reaffirmed its full-year revenue growth outlook of 6% to 12%, while narrowing its gross margin outlook and raising its earnings forecast. Gross margin is expected to be between 51.5% and 53%, up 50 basis points on the low end from previous guidance, with GAAP EPS of $5.15 on the mid-range. The new midpoint aligns with the previous high and may have risen again later in the year.
WD-40 Company Outperforms in Q2, Improves Balance Sheet and Value
WD-40 Company reported a solid second quarter and delivered results above the consensus reported by Marketbeat. Revenue of $139.1 million increased 6.8% from last year, bringing the year-to-date total up 10%. The forex tailwind added 180 basis points to growth. Emerging and developing markets led with a 16% gain, helped by new markets and greater penetration. Asia-Pacific grew 4% and the Americas 15%. WD-40 Multipurpose grew 7% on a product basis, led by a 10% increase in Specialists. The “other” segment grew 9% and Harvest Brands fell 3%.
The news on margins is good. The company’s GAAP net income and earnings declined year-over-year due to increased advertising spending and the acquisition of the Brazilian distributor, but gross margin is increasing. Gross margin improved 160 basis points in the second quarter to 52.4%, bringing the year-to-date improvement to 200 basis points. GAAP results are down but offset by the impact of reinvestment and future profit gains. However, GAAP earnings of $1.14 were better than expected and contributed to significant balance sheet improvements.
There is nothing wrong with WD-40 Company’s balance sheet or dividend
Balance sheet highlights include increased liquidity, stable debt/liabilities, and improved shareholder equity. Cash balance increased 15% in a positive quarter with cash flows, assets increased 1%, liabilities decreased 1%, and equity increased 3%. The cash flow and balance sheet allow for capital returns, including dividends and share repurchases.
Share buybacks are strategic and primarily aim to offset stock-based competition; share count is down -0.2% year over year. The dividend is more consistent, equal to 1.4%, in line with the general market average and is reliable. The company pays out about 65% of earnings, a relatively high payout ratio, but sustainable considering its balance sheet, cash flow and growth prospects. This industrial stock has a solid history of dividend increases and is expected to increase again at the end of the fiscal year.
The company WD-40 falls into the buy zone
WD-40 Company’s stock price action fell more than 3% at the open, but early action suggests this is a dip buying opportunity. The stock began bouncing almost immediately after the open and could continue to be supported until the end of the session. If so, this stock could continue to bounce and rise until it repeats recent highs soon. If not, this market could enter a range below $255 before moving higher later in the year.
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