There's an interesting press release out from WD-40
WD-40's stated goals break down this way: 7.6% to 9.3% compound annual revenue growth, 9.8% to 12.1% net income growth, and 8.1% to 10.4% earnings-per-share growth. On the surface, those numbers don't sound wildly out of line, but it's worth looking at recent history for a comparison.
Over the past three years, WD-40 has turned in compound annual growth in revenue, net income, and earnings per share of 6.7%, 4.1%, and 2.7%, respectively. Those historical numbers are lower than the company's future goals, but the company's performance in the most recent year comes closer to the stated goals, with gains of 8.6%, 8.4%, and 10.4%, respectively.
This begs the question: Can WD-40 build upon its performance gains in the last year, or will it fall back to its lower, more average performance level of the past three years? The company's recent performance bodes well, but recent inflation in raw materials prices and the company's mediocre earnings guidance for 2006 are both concerns that suggest its long-range targets may be too optimistic.
The wildcard in the assumptions is whether the company will make any acquisitions. If it does, the revenue and net income targets should be fairly easy to meet. However, depending upon the price paid and how the purchase is financed, the earnings-per-share targets may be tough to hit. This is an important consideration for a company that has been fairly acquisitive in the past five years -- with mixed results.
A very basic free cash flow valuation for WD-40 reveals that the company is about 15% undervalued if you assume it will hit the low end of its goals, and about 30% undervalued if you believe it will hit the high end. However, if you think the company will turn in something closer to 5% growth, look out; the company is about 10% overvalued with that assumption.
The bright spot in all of this is the company's 3.2% dividend yield, which is consuming less than half of its free cash flow. All things considered, WD-40 looks fairly priced to me, but its relatively large yield is enticing and the company is worth paying attention to, especially on any stock price dip.
Oil for information, anyone?
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