Are investors overlooking an important change in the fourth-quarter results of consumer products company WD-40
In October 2003, the company announced a five-year plan that called for compounded annual revenue growth of 6% to 8% and annual net income growth of 8% to 11%. Fiscal year 2004, the first year after the plan's announcement, was a disaster. Sales increased 1.8%, and net income fell 10.5%. The just-completed year saw a 9% increase in net sales and an 8% increase in net income.
What may not be obvious -- it isn't mentioned in the company's fourth-quarter press release but it is in its annual report to the SEC -- is that the company is benefiting from price increases it implemented during the third quarter. The proof is that a 6.4% increase in fourth-quarter sales over the comparable year-ago quarter was overshadowed by a 17.7% increase in net income.
To me, that's indicative of pricing power the company has not shown before, although some of this may be attributable to the company's ability to pass increases in raw materials costs (read: inflation) onto consumers and, therefore, may be less likely to stick.
Driving the sales gain are innovations to the core product line that include the WD-40 Smart Straw and the WD-40 No-Mess Pen -- both of which made it to my garage. The 2000 Flushes clip-on product was also a hit that allowed WD-40 to gain market share in a retail environment where shelf space for this kind of a product is shrinking.
There was even good news for skeptics like me who have been unimpressed with the company's acquisitions. Right after the company acquired U.K. carpet and household cleaner company 1001, it introduced the Spot Shot and Carpet Fresh No-Vac products under the 1001 brand name. These new products contributed 25% of total sales from the 1001 line for 2005. Now that's the way to grow a brand!
So what's the bottom line?
Analysts expect the company to compound earnings at an 8% rate for the next five years. Remember, the company's goal is 8% to 11% compounded growth. The stock is trading for 16.7 times trailing earnings, working down its debt, and using available cash to repurchase its own shares. Consider what would happen to this defensive stock's multiple if earnings did compound at 11%.
Competitor Church& Dwight
Well, don't get excited just yet. For 2006, the company expects sales to increase 9% to 14% but for earnings to be between $1.53 and $1.72 a share (after this year's $1.65 a share) after adjusting for stock options expense. And there's no word on why the company isn't going to meet its five-year plan target for earnings, either. Earnings are this company's squeaky wheel, and that wheel's squealing pretty loud right about now. Perhaps it could use some of that WD-40 itself?
The downside to any small consumer products company is that it has to work itself into the good favor of mass merchandisers like Wal-Mart
So for now, it looks like the formidable marketplace is tempering any growth in WD-40's earnings -- pricing power or not.
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Fool contributor W.D. Crotty owns shares in WD-40 and Home Depot. Click here to see The Motley Fool's disclosure policy.
