Bottom of the Barrel: Greasing Up the Portfolio With WD-40

If you're looking for an investment to remove the squeaks from your portfolio, you might check out WD-40 (WDFC).

There aren't a lot of companies where the name says it all, but it's true at this San Diego-based maker of the famed lubricant. I remember my grandfather -- a fine carpenter in his time -- saying that if something squeaked, WD-40 was sure to be the cure. Although the company has expanded beyond the aerosol-based petroleum lubricant, the product remains its primary brand.

Squeaky Clean

Besides its namesake brand, the company also markets 3-in-One oil, a product similar to WD-40 with many household uses. It recently launched 3-in-One Professional, a slightly more heavy-duty version that should help the company capture more of the commercial market for basic lubricants.

However, the company's more recent expansion is into hand-cleaning products and household cleaners, where it has amassed a nice stable of brand names. In the heavy-duty hand cleaners, WD-40 peddles Lava and Solvol, which are both relatively high-margin.

In the household cleaner market, WD-40 owns X-14, 2000 Flushes and Carpet Fresh. More recently, the company acquired Spot Shot, a remarkable solvent (I can say from experience) that will remove just about any stain on upholstery or carpet. These higher-end products can be cross-marketed to both residential and commercial users.

The promotional costs of establishing brand loyalty and building scale in these names has caused some expense creep, but management has done a relatively good job of controlling costs and has recently increased its focus on efficiency. That should begin to translate into better margins over the next several quarters.

While WD-40 isn't likely to steal major market share from the big consumer-products companies in the personal and household cleaner markets, it should be able to hold its own with a more modest promotional budget, especially in the high-end consumer and commercial markets. Opportunities also exist in international markets, where meaningful growth was seen in the company's most recent quarterly report, especially in Europe and Asia. (The company's fiscal year ends Aug. 31.)

Clean Growth

WD-40 has done a relatively good job of keeping its balance sheet simple. It has debt of about $95 million and has more than doubled its cash position over the past year, to nearly $24 million as of the end of February. That provides plenty of flexibility should a complementary brand come along as an acquisition possibility.

If the company can reduce expenses further, sales growth of 8% to 9% a year could translate into bottom-line growth in the low teens. Improving margins could increase the earnings growth rate, but economic uncertainties -- both here and abroad -- suggest that a more conservative assumption would be prudent. While WD-40's basic consumer products are less subject to economic gyrations, an anemic consumer can have an impact on both sales and margins.

Fair Value

Another attractive feature of WD-40 is its dividend, now providing a yield of about 3%. After cuts over the past two years brought the payout more in line with its peers, the dividend appears stable. In today's market environment, the yield should serve to help reduce volatility in the stock.

The basic nature of the company also is something to like in an uncertain market. However, trading at nearly 16 times earnings, it appears to be near fair value and is likely to grow slowly, on pace with bottom-line growth. Hence, investors should be keenly focused on management's ability to deliver on cost containment and margin improvement.


Slick!
WD-40 shows growth promise
Year Revenue (in millions) Earnings Per Share
2002 $216.80 $1.57
2003E $240.00 $1.65
2004E $260.00 $1.75
Source: Value Line, Company Reports, TSC Research

WD-40 is a slick company with a fair price. I give it 2 1/2 barrels (losing a half-barrel for valuation) and slide it -- without a squeak -- into the Bottom of the Barrel income portfolio. (For an explanation of our barrel rating system, see our description.)

Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.

More from Opinion

It's Just Not Smart For Investors to Ignore the Threat of a Trade War

It's Just Not Smart For Investors to Ignore the Threat of a Trade War

To Think a Trade War's Still Just a Threat Is the Dumbest Thing on Wall Street

To Think a Trade War's Still Just a Threat Is the Dumbest Thing on Wall Street

Flashback Friday in Politics: Trade Wars, Manafort, Immigration Dominate Minds

Flashback Friday in Politics: Trade Wars, Manafort, Immigration Dominate Minds

Microsoft and Sony's Rumored Game Console Plans Bode Well for AMD

Microsoft and Sony's Rumored Game Console Plans Bode Well for AMD

Apple Supplier Jabil Is Tumbling, But Its Sales Momentum Remains Strong

Apple Supplier Jabil Is Tumbling, But Its Sales Momentum Remains Strong