Friday, 16 October 2015

The price I would buy shares in the always impressive WD-40

In terms of well-run sensible industrial companies with a good underlying product WD-40 ranks right up there.

I listened to yesterday's fiscal fourth quarter / full year conference call and noted the three pages (of a twenty-two page presentation) that the company dedicated to explaining FX translation/related issues - yes, the impact of being a global revenue/profits generating business at a time of relative US dollar strength does hurt - as you can see by this except from the company's presentation document (note all those downward red arrows outside of the US): 

Listening to the conference call the company noted some of the practical impacts: 
  • First time in a while did not meet Europe/related targets due to Russia
  • Americas – noted sales declines in Canada hit by FX
  • US – sales helped by new distribution, promotion
  • Asia – ‘optimistic…but expect volatility’

However all of this was not some huge and great disaster.  Note the gross margin progression below negatively impacted by FX of course but such factors being more than offset by positives from lower oil prices.
And in perhaps the most interesting presentation slide of the deck the company upped their gross margin and ebitda margin targets.  No more the 50/30/20 model...but a 55/30/25 one.  Impressive if they can pull it off.  
Inevitably the next year is just a work-in-progress towards such targets as shown by the FY16 guidance:
Still the above suggests an estimated 8.5% EPS growth progression.  Of course such progress tends to come at a cost...and that is valuation with the company still trading close to x20 EV/ebit albeit supported by a 1.6% yield and a current buyback equal to over 4% of the market cap.  Investors are being rewarded for the company's ungeared balance sheet.  

General corporate initiatives sound positive (multi-use WD40, bendy delivery straw WD-40 cannisters etc.).  I discussed last time I wrote the company up (link here) that:

'I like the brand, product and corporate ethos but at a prospective x15s+ EV/ebit multiple (even with a very low net debt balance sheet) there is a better price to get involved. First look something below an US$80 share price'

I think there has been further progress here and so I am tempted today to suggest below US$85...a level which usefully over recent weeks has been a line of support/resistance:

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