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On a day in which the Dow Jones Industrial Average soared more than 100 points at the open, one notable underperformer was WD-40 Co. (NASDAQ: WDFC). The company released disappointing earnings for its fiscal second quarter on Friday, and the stock fell 5% as a result.
WD-40 sells maintenance, home care and cleaning products. Its products include penetrants, de-greasers, corrosion inhibitors, lubricants and rust removers. The stock has had a great run in the past several years – shares are up 25% in the past year alone – but investors appear to be questioning whether the stock still deserves its lofty valuation, in light of its disappointing results.
Profits Beat, But Revenue Comes Up Short
For the quarter, WD-40 earned $13.7 million in profit, or $0.94 per share, on $94 million in revenue.
WD-40’s earnings beat the average analyst estimate by $0.08 per share, but revenue fell short last quarter. In addition, the company’s future outlook held the same pattern. While fiscal 2016 earnings guidance of $3.40-$3.47 per share is higher than the average analyst estimate, revenue guidance of $385 million to $394 million is below consensus.
On a year-over-year basis, WD-40’s revenue declined 3% last quarter. The company is getting hit hard by currency fluctuations, as the U.S. dollar is weighing on multinational companies that conduct significant operations in international markets.
To the company’s credit, it managed to grow earnings per share by 23% for the quarter, due mostly to the benefits of its share buyback program. In the trailing one-year period through Feb. 29, the company repurchased more than 340,000 shares at a total cost of $30.8 million, under its current $75.0 million buyback authorization.
For the full fiscal year, management expects it will grow net sales by 2%-4%. But investors don’t seem too convinced with that forecast and are taking some profits off the table. If the rally in the U.S. dollar continues, the company may not be able to meet the WD-40 growth projections, given last quarter’s revenue decline.
Valuation Seems Too High
Investors are now re-evaluating WD-40’s valuation, in light of its weaker-than-expected growth.
The stock seems overvalued on a number of metrics. For example, shares trade for 32 times trailing earnings and 27 times forward EPS estimates. Compare this to the S&P 500 index, which trades for around 21 times earnings.
Moreover, WD-40 stock is valued for 4 times sales, and 10 times book value. If the company’s growth trajectory slows down, it’s reasonable to assume investors won’t keep paying such a premium valuation. A return to market multiples would result in a significant decline for the stock.
One positive aspect of the stock is that it pays a dividend. Although the current dividend yield is 1.7%, which is less than the average S&P 500 dividend yield, WD-40 has grown its payout at a rapid clip. It has raised its dividend at a 9% compound annual rate over the past five years, including its recent dividend 10.5% increase for the 2016 first-quarter payout.
Still, the company would have to raise its dividend at a very high rate each year in order to adequately compensate investors for the downside risk associated with its valuation.
Stay Away
Between 2010 and 2015, WD-40 grew its diluted earnings per share by 9% compounded annually, due to higher sales of its top products. This is a solid growth rate, but in that same time frame, the valuation multiple expanded from 18 times earnings at the end of 2010, to its current level.
Existing shareholders have been handsomely rewarded with excellent returns over the past several years. However, its underlying earnings growth does not seem to justify such a huge increase in share price. The biggest reason for WD-40’s soaring stock price in recent years is mostly multiple expansion, but it’s worth mentioning that investor sentiment can change quickly, as it did Friday.
The markets can be fickle, and momentum can reverse in a short period of time. With that in mind, risk-averse investors should wait for a meaningful correction before buying shares of WD-40.
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