WD-40 (NASDAQ:WDFC) is on a mission to build positive experiences and "lasting memories." That seems somewhat out of character for a company that makes a chemical substance stored in an aerosol can, but this focus on building positive experiences is the root of a powerful brand.
A can of WD-40 can do just about anything: remove oil from hands, fix a squeaky hinge on a door, remove stains, prevent rust, clean caked-on food from stove tops, lubricate motorcycle chains, or unstick a car door during cold weather. You can even spend your weekend using the product to remove insect guts off your car.
The positive feeling that customers have after fixing an annoying problem like the ones above with a can of WD-40 explains in part how the company is still growing after 65 years in business. A $10,000 investment in WD-40 at the beginning of 2000 would be worth $80,000 excluding dividends today.
So should you buy the stock? Let's take a look.
Predictable sales growth and a high valuation
The first thing that jumps out at a potential investor is the stock's high valuation. Since 2010, the stock's trailing price-to-earnings ratio has expanded from about 20 to 37 at current market prices. That implies very high growth expectations. But is WD-40 a high-growth company?
Over the last 10 years, earnings per share climbed 193%, or about 11% per year. Sales growth is typically in the single-digit range every year. So historically, WD-40 hasn't grown fast enough to justify such a high valuation.
Is anything going to change that trajectory?
The blue can with the little red top is still growing
Management has a goal to grow revenue from $408 million to $700 million by fiscal 2025, representing a compound annual growth rate of about 8% -- consistent with its historical rate of growth.
The company has done a great job in the past at keeping margins firm. Management's goal is to run the company based on its 55-30-25 strategy, which is to maintain gross margin at 55%, keep operating costs at 30% of revenue, and deliver an EBITDA margin of 25% each year.
Management introduced this strategy in 2016, and so far it has delivered. However, EBITDA margin dipped to 21% last year. Despite that setback, operating margin has steadily improved over the last decade, so this seems like a company that shareholders can depend on to continuously squeeze more profit out of operations and grow earnings faster than the top line.
Analysts expect the company to expand earnings by 10% per year over the next five years, higher than management's sales target for 8% annual growth. Regardless, plenty of stocks out there offer more growth for a much lower P/E multiple than WD-40.
Wait for better prices
Going forward, investors can expect WD-40 to keep doing what it's been doing: expand its current products to new markets around the world and continue to broaden the product base. However, investors shouldn't expect a sudden acceleration in growth to justify the stock's high P/E ratio of 37 times earnings.