Industrial lubricant and degreaser company WD-40 (WDFC -0.18%) has had a great run in the last decade, but it's getting harder and harder to justify buying into the stock at present levels. The company may yet hit its long-term revenue target of $700 million in 2025, but it appears to be falling behind the pace necessary to get there. In addition, its valuation appears to be pricing in a lot of optimism. Let's take a look at what's going on with the company in light of the recent earnings report.
Playing the long game
To be fair to the company, its management has always stressed that it wasn't running the company for its quarterly results, but instead with a view to the development of its long-term strategic aims -- an approach that CEO Garry Ridge likes to call "the infinite game." Indeed, Ridge doesn't give quarterly guidance -- he says, "I frequently caution investors not to follow us too closely quarter to quarter" according to the earnings release.
Image source: Getty Images.
That said, management does give yearly guidance and its medium term revenue targets are well known. Unfortunately, the company appears to be falling behind them. For example, net sales growth is projected to be 3% to 7% in fiscal 2020, but the company actually reported a 3% decline in the first quarter. Moreover, net sales growth for 2019 was only 4% -- at the bottom of the company's guidance range of 4% to 7%.
No matter, management maintained its full-year 2020 guidance on the recent earnings call. Moreover, it reiterated its aspirations to hit $700 million by the end of 2025, with COO Steve Brass also outlining that quarterly revenue can fluctuate significantly due to a "myriad of things including the level of promotional activities, specific programs being run at customer locations, the timing of customer orders or the impact of new product launches."
Targets for 2025
That's all well and good, but based on management's own targets it's not going to be a walk in the park getting to the 2025 aspirational aim. For example, here's a breakout of what management achieved in 2018 and 2019 and what needs to be done in terms of its compound annual growth rate (CAGR) in order to reach its targets.
As you can see below, the CAGR assumptions for its core WD-40 multi-use product and its WD-40 specialist products imply significant pickups in growth.
|
Revenue |
2018 |
2019 |
Change |
2025 Target |
2019-2025 CAGR |
|---|---|---|---|---|---|
|
WD-40 multi-use |
$314 million |
$326 million |
3.8% |
$530 million |
8.4% |
|
WD-40 specialist |
$31 million |
$35 million |
12.9% |
$100 million |
19.1% |
|
Other |
$45 million |
$52 million |
15.6% |
$70 million |
5.1% |
|
Overall |
$390 million |
$413 million |
5.9% |
$700 million |
9.2% |
Data source: WD-40.
Growth initiatives
In order to hit its targets, management plans to expand the global reach of the WD-40 brands. The company also aims to increase the percentage of sales of the WD-40 multi-use product cans that are sold with a smart straw from 41% in 2019 to 60% by 2025 -- a result expected to generate $50 million in additional revenue. The first quarter saw WD-40 multi-use sales decline 3%, an event management put down to "lower sales in Asia-Pacific due to the timing of customer orders in our Asian distributor markets and in China."
Meanwhile, management is trying to boost WD-40 specialist sales growth by launching new packaging for the brand -- note that sales of WD-40 specialist products was only $8.4 million in the first quarter, a similar figure to the first quarter of last year.
Valuation concerns
In a nutshell, WD-40 was hit by timing events in the quarter, but its operational performance was slightly disappointing in 2019 and the first quarter of 2020 hasn't started that well either.
All of this is a concern given that the strong stock price rise has taken its valuation to new all-time highs. Whichever measure you use to value a stock, it's hard to argue that WD-40 is a great value right now.
WDFC EV to EBITDA data by YCharts
A stock to buy?
Putting it all together, the recent operational performance has been disappointing, the company has a challenge to hit its aspirational targets, and the stock trades on a high valuation. Simply put, the risk is rising, but the stock price isn't offering any margin of safety for error.
For the bulls, this is just a growth pause and WD-40 will surely see a rise in growth. Orders from Asia should bounce strongly after a weak first quarter, and the ongoing initiatives with smart straws and repackaging will surely bear fruit soon enough. However, for most investors, WD-40's valuation probably looks a bit rich for now, and adopting a "wait and see" approach makes more sense right now.
