There are great companies, and there are great stocks. The two are often the same, but in the case of 3D engineering and design software company Autodesk (ADSK 0.61%), automation company Rockwell Automation (ROK 1.86%), and universal lubricant company WD-40 (WDFC 0.47%), a great company is matched with a not so great valuation. All three trade on sky-high valuations and have some aggressive-looking earnings targets to meet in order to make them a good value.
WD-40
Let's take a look at WD-40's enterprise value (market cap plus net debt), or EV, to earnings before interest, taxation, depreciation and amortization (EBITDA) multiple. Simply stated, EV-to-EBITDA. It's a useful metric that includes an appreciation for debt levels.
There's no way around the fact that all three of the above-mentioned companies trade on hefty absolute valuations, and WD-40 has a particularly high rating compared to its historical performance.
The question is, does WD-40 really deserve such a high rating? It's a great company, with a ubiquitous and popular product that's sold in hardware stores and car parts retailers worldwide. However, management is falling behind on its long-term targets.
For example, up to the first quarter of 2020, management aspired toward $700 million in sales by 2025 -- only to switch that to a goal of $700 million in sales as a "long-term target" in the second quarter. You could argue that this would be fair enough, given the impact of the COVID-19 pandemic, but I don't think it's the complete picture.
Let's put it this way. Sales were $423 million in 2019, and management started 2020 forecasting 3%-7% sales growth -- implying sales of $436 million to $453 million for the full year. Unfortunately, the pandemic hit WD-40 in its fiscal 2020 (which ends in Aug. 31) and full-year 2020 sales came in at $408 million, representing a $37 million shortfall from the midpoint of initial guidance. Note that figure.
While the lockdowns initially hurt WD-40, it's also the case that stay-at-home measures started helping companies with exposure to spending on DIY and home improvement. Consequently, sales rose 5% in WD-40's fourth quarter of 2020 and then a whopping 26% in the first quarter of 2021. Indeed, management is guiding toward $435 million to $470 million in full-year 2021 sales, with the analyst consensus standing at $461 million.
But here's the thing. The figure of $461 million in 2021 actually represents a compound growth rate of 4.3% from 2019-2021 -- a figure that lies within management's guidance of 3%-7% for 2020, and suggests that WD-40 hasn't been hit that badly by the pandemic.
Finally, let's take a look at the Wall Street consensus for sales in the coming years. According to these numbers, WD-40 needs to grow sales by 16% a year from 2023-2025 to hit the former target of $700 million in sales in 2025. It's not hard to see why management backed off this aim.
WD-40 Metric |
2018 |
2019 |
2020 |
2021 Est. |
2022 Est. |
2023 Est. |
---|---|---|---|---|---|---|
Net sales |
$409 million |
$423 million |
$408 million |
$461 million |
$487 million |
$523 million |
Growth |
7% |
3.4% |
(3.5%) |
13% |
5.6% |
7.4% |
All told, pandemic or no pandemic, the company appears to be falling behind on its goals, and that makes it very hard to justify buying a stock trading on a current and forward EV-to-EBITDA multiple in the high 30s.
Rockwell Automation
Rockwell is the leading U.S. factory automation company and also a major player in process automation. As such, it's is a great way to play the long-term trend toward automating production and digitizing the factory. Rockwell is an exciting company, and investors can expect a snapback in growth in 2021.
Indeed, speaking on the company's fourth-quarter earnings call in November, CEO Blake Moret told investors: "It may take a couple of quarters for us to climb back to year-over-year sales growth from the Q3 trough in fiscal '20. We expect double-digit year-over-year growth during our third and fourth quarters."
While those targets look feasible given how bad Rockwell's fiscal third and fourth quarters of 2020 were, it does mean that a positive outlook is now baked into Rockwell's valuation.
Trading on an estimated EV-to-EBITDA multiple of 22 times, Rockwell's valuation implies that the market believes it can exceed analyst estimates in 2021. That remains to be seen, and given the relatively high valuation, Rockwell is definitely a stock to put on the watch list rather than the buy list for now.
Autodesk
Autodesk has excellent growth prospects after moving to selling its design and engineering software on a cloud-based subscription basis rather than via a software license. Meanwhile, the digital revolution, 3M modeling, and the ability to collaborate remotely on design using the cloud will drive sales growth for years to come.
It's a great business, but management may well have set overly aggressive targets for the company. For example, during its investor day presentation in June management targeted $2.4 billion in free cash flow (FCF) in fiscal 2023.
That's all well and good, but then on the third-quarter earnings presentation in November, management said FCF would be $1.3 billion to $1.36 billion in fiscal 2021, and then rise approximately 20% in fiscal 2022. These figures imply around $1.6 billion in 2022, meaning that FCF will have to rise 50% in 2023 for Autodesk to hit the $2.4 billion target. Frankly, that's a bit of an ask for a company aiming for high-teens annual revenue growth over the period.
Given that Autodesk trades on an estimated 2021 EV-to-EBITDA multiple of 57 times, it could prove to be a rich valuation if the company doesn't meet the target of $2.4 billion in FCF in 2023. To be fair, it's not a major concern in the long term because Autodesk has very strong growth prospects. However, for investors who don't like near-term risk, it might make sense to wait and see before buying into the stock.