Is Now The Time To Buy WD-40 Company?
Shares of WD-40 Company (NASDAQ: WDFC) are down 15% in the wake of the Q2 results opening up a deep discount into a post-pandemic, economic-reopening winner. The move is driven by sentiment and expectations, expectations that weren’t met, despite a great quarter and upside guidance. With growth, improving profitability, dividends, and dividend growth in the future we can’t help but view today’s decline as tomorrow’s profits. What we’re trying to say is that this 12% discount in WDFC stock sure looks like a buying opportunity to us, now it’s time to see if the market agrees with us.
WD-40 Company Misses Top And Bottom Line Consensus
The WD-40 Company had a pretty good FQ2 with 11.9% topline growth. The problem is that analysts were expecting closer to 14% making this a miss in terms of the market. Another factor weighing on shares is the positive impact of FX on revenue, an impact worth $2.7 million or about 300 basis points of growth. On a segment basis, the North American market was weakest with -1% growth but that was more than offset by a 19% expansion in the EMEA region and 39% in APAC. In terms of products, maintenance products sales grew 13% while home and cleaning clocked a more tepid 3% gain.
Moving down the report, the company reports a decrease in gross margins that helped drive a solid bottom-line result. Gross margins are up 80 basis points in the quarter, 200 basis points for the YTD period, and should expand in the second half as supply issues are resolved. On the bottom line, the GAAP $1.24 in earnings missed by $0.07 due to increased ad-spending and promotional expense.
The mitigating factor for us is that the sales miss will most likely be caught up in the second half of the year. The company says supply constraints, we read shipping and freight issues as well as shortages of primary supplies possibly linked to shipping and freight issues, cut into sales. If not for that the Q2 results would have easily met and exceeded consensus. Turning to the guidance, the company has raised FY guidance to $445 to $475 but this is conservative at best. The company has already earned 50% of the high-end of their revenue range with solid demand and economic acceleration going into an historically strong sales period.
“the pandemic has also caused some disruptions and constraints to our supply chain, primarily in the Americas, which impacted our ability to meet the increased end user demand we experienced in the United States during the second quarter. Despite these supply chain challenges in the United States, we continue to experience very strong point-of-sale end user demand for our maintenance products. We are working to address the supply chain challenges and there is a recovery plan underway which we expect will result in improved conditions in the back half of the year,” says CEO and Chairman Gary Ridge.
The WD-40 Dividend Is Safe And Growing
WD-40 Company pays a safe and growing dividend if only with a 1.0% yield. The company is paying out only 50% of its earnings in dividends right now and that is with the recent 8% increase. The balance sheet is a fortress so there is no worry there, debt is incredibly low, leverage is only 2.5X cash flow, and there is ample free cash flow for a 12th consecutive increase early in 2022. Based on the history, FCF, and earnings outlook we think the next increase will be in the range of 10%.
The Technical Outlook: The Shorts Are In Control Of WD-40 Company
Shares of WDFC are down 15% in the wake of the release due in part to the miss but also because of high short interest. The combination of lackluster results and high-short interest has the stock down testing support at what could be a strong level and entry point for new money. The caveat is that the bears are still in control, this level may turn into support but it isn’t evident yet. If price action is able to consolidate here and/or make a bounce we’d start getting interested again. If not then this stock may move down toward the $200 level. In either case, we think this stock is going to turn into a strong buy.
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