Streetwise

Lauren Rudd

Sunday, October 2, 2011

Slide Through October with WD-40

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, the indefatigable avarice, instability and volatility you see on Wall Street today extends beyond anything I can recall during my career of 40 plus years.

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 consider 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 Jones industrial average down 23 percent. Moreover, we cannot forget the relatively minor “October massacres” in years such as 1978, 1979, 1989, 1997 and 2008.

So what should you do when there is a major market downturn? First, do not to be unduly swayed by the negativism. 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 performance in return.

A good example is the WD-40 Corporation (WDFC). WD-40 lays claim to three nearly indispensable brands of lubricant, WD-40 in the ubiquitous blue and yellow can, 3-IN-ONE household oil and BLUE WORKS, a high performance dry lubricant. Other products include X-14 mildew remover and Carpet Fresh.

With sales in more than 160 countries, WD-40 recorded revenues of $321.5 million for its 2010 fiscal year ended August 31. My earnings estimate a year ago for the 2010 fiscal year was $2.17 per share with a 12-month target price on the shares of $42 for a capital gain of 12 percent.

So how did WD-40 do? The company posted 2010 earnings of $2.15 per share leaving me two cents light. The shares recently closed at $40.25, as compared to a price a year ago of $37.71, for a capital gain of 6.2 percent. Added to that was a 2.7 percent dividend yield for a total return of 8.9 percent.

As was the case for many companies, WD-40’s share price was accelerating upward until the latter part of last July when the market as a whole declined. For example, July 21 saw WD-40 trade as high as $47.75. The market rout was psychological in nature and the subsequent reduction in share prices often had no correlation to an individual company’s financial performance.

Meanwhile, third quarter sales for the period ended May 31 were $85.5 million, an increase of 4 percent over the same period a year ago. Year-to-date sales were $245.7 million, up 2 percent over the same period a year ago. Earnings for the third quarter were $8.1 million, a decrease of 12 percent compared to the prior year, while year-to-date earnings were $26.2 million, also a decrease of 10 percent when compared to a year ago.

Much of the decline in earnings can be attributable to higher commodity prices, which the company is dealing with by raising prices itself. There was also a weather issue.

Looking at the company’s guidance going forward, net income is forecasted at between $34.9 million and $36.6 million on revenues of $330 to $340 million. Earnings guidance is $2.05 to $2.15 per share, with about 17 million weighted average shares outstanding.

The intrinsic value of the shares, using a discounted earnings model with an earnings growth rate of 12 percent applied to earnings of $36.1 million with a discount rate of 15 percent is $48 per share. The more conservative free cash flow to the firm model yields an intrinsic value of $66 per share. As mentioned previously, the shares recently closed at $40.25.