This Small Cap Is a Bad Omen for the Dow

The Dow Jones Industrial Average (INDEX: ^DJI  ) and the S&P 500 (INDEX: ^GSPC  ) rose 0.8% and 0.7%, respectively, for a good start to the week.

What can a company with fewer than 350 employees and a market capitalization of less than a billion dollars possibly tell us about the prospects for the Dow's earnings season? Quite a bit, potentially, if that company happens to be WD-40 (Nasdaq: WDFC  ) , which sells (among other products) the lubricant of the same name. Today, it told us nothing good, but before I get to that, let me tell you why it's relevant:

First, WD-40 is effectively a multinational company: In its fiscal 2011, it generated half of its revenues and nearly two-thirds of its operating profits outside the Americas.

Second, although Procter & Gamble's (NYSE: PG  ) market capitalization is more than 200 times that of WD-40, the two companies have something in common: brand power. It's a remarkable achievement on the part of WD-40: How many other billion-dollar companies are household names? In that regard, the competitive position and economics of WD-40 are closer to that of a blue-chip than the average "no-moat" small-cap company.

So, what exactly happened with WD-40? Reporting earnings after the bell today, the company said it expects to earn between $2.31 and $2.40 per share on sales of between $356 million and $370 million in fiscal 2013. The consensus estimates up to that point called for earnings per share of $2.56 per share on revenue of $369.3 million, so investors were not pleased, sending the shares down more than 9% in after-hours trading.

How does this relate to the stock market? On Oct. 4, the estimate for 2013 earnings for the S&P 500 index was $115.13. At the end of the first week of the earnings season, that estimate had fallen slightly to $114.82. At less than three-tenths of a percentage point, the decline may be statistically meaningless, but it's important to watch that figure. If the decline continues, it will be that much harder for the broad market indexes to sustain the gains they have made year-to-date.

A brand is a source of competitive advantage. Companies that can create and sustain a brand (or better yet, a portfolio of brands) generate enormous returns on behalf of their shareholders over long stretches. As such, one of The Motley Fool's top analysts has identified The 3 Dow Stocks Dividend Investors Need. Click here to claim your free report and find out which ones they are.

Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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