Streetwise

Lauren Rudd

Sunday, October 3, 2010

Wall Street Has Never Been a Walk in the Park

Maybe I am getting too old and soft to deal with Wall Street. I admit that the Street has never been a walk in the park and that greed and one-upmanship are part and parcel of the investment world. However, when you learn that each of the top 25 hedge fund CEOs had an average income of $1 billion in 2009 and are now complaining bitterly about the possibility that they might face a small rise in their tax rate, you begin to wonder.

Meanwhile, October is upon us once again, that time of the year when trees display their fall colors and pumpkins debut as pumpkin pie. It is also the most dreaded month in the annals of investing, the month of black Mondays.

Does October really deserve its rotten reputation? There is some justification for the bad rap when you take into account the debacle of October 1929. More recent, but still only history book material for most of those on Wall Street today, is the decline on October 19, 1987 that sent the Dow down 23 percent and resulted in the initiation of this column. Of course we cannot forget the relatively minor “October massacres” of 1978, 1979, 1989 and 1997.

Nonetheless, Wall Street is an inherently forward-looking animal. In economics we call it a leading indicator and right now the markets are pointing towards better times and an improving economy.

So what actions should you take with regard to your portfolio? The first is not to be unduly swayed by the negativism that currently surrounds the financial markets. Investing can be deadly if you dance along with the crowd for no other reason than to join in.

Instead, determine what you can realistically expect from a specific company in terms of earnings over a 12 to 24 month period. Pick quality companies to invest in and you will receive quality returns in return.

A good example, and a company I have not talked about for several years, is the WD-40 Corporation (WDFC). If you are one of the few people that do not have one or two of the familiar blue and yellow cans sitting around, WD-40 is a global consumer products company offering unique, high-value and easy-to-use solutions for a wide variety of maintenance needs.

The company markets three generally well recognized brands of lubricant, WD-40, 3-IN-ONE household oil and BLUE WORKS, a high performance dry lubricant.  The company also offers eight home care and cleaning product brands such as X-14 mildew remover and Carpet Fresh. WD-40 markets its products in more than 160 countries and recorded sales of $292 million in fiscal year 2009.

By way of reference, the shares are up 16.72 percent this year, while the three year average increase in share price is 10.63 percent. The company reported third quarter ended May 31 net sales of $82.6 million, an increase of 20.0 percent from the same period a year earlier. Net income for the third quarter was $9.1 million, an increase of 32.2 percent over the prior year's third quarter. On a per share basis, the company earned $0.54 in the third quarter, compared to $0.41 per share a year ago. Over the past nine months, earnings per share were $1.74 compared to $1.12 for the same period a year prior.

The company’s guidance for fiscal year 2010 calls for net sales of between $313 million and $319 million, representing a growth rate of between 7.2 and 9.2 percent, when compared to fiscal year 2009. Net income is expected to come in at between $34.4 and $36.0 million with earnings per share of $2.05 to $2.14. Since that guidance was released, the company has indicated that it would probably exceed it.

The intrinsic value of the shares using a discounted earnings model is $40 per share, while the more conservative free cash flow to the firm model produces an intrinsic value for the shares of $47. The shares recently closed at $37.71.