Streetwise for Friday, October 26, 2018

As we enter the fourth quarter, do not become unduly swayed by market negativism, most often seeded by a variety of supposed experts and expertly cultivated by the media. Yes, the markets have been volatile.

And any company whose numbers do not meet Street expectations for past results or future projections will quickly find that itself subject to the wrath of Wall Street.

However, if your research indicates that a company is performing in accordance with your wishes and desires but has become a victim of events beyond its control, such as ever-increasing tariffs, consider staying the course.

Investing can be deadly if you dance along with the crowd. Remember that investing in individual companies is not the same as investing in “the market.” Instead, determine what you can realistically expect from a specific company in terms of earnings over a 12 to 24-month period.

You also might want to consider investing in companies that are not necessarily in the news on a regular basis. One place to start your research might be the WD-40 Corporation (WDFC).

WD-40, that ubiquitous blue and yellow can, be found in over 80 percent of all households. This is higher household penetration than that of Coca-Cola, Gillette razors or most any other dominant household consumer brand.

Yet, last time I checked, only one or two analysts were following the company, meaning it is less likely to be subjected to negative media or Street commentary.

When I last wrote about the company my earnings estimate for fiscal 2018, company’s fiscal year ends August 30, was $3.80, with a 12-month target price on the shares of $118 for a 10 percent capital gain. So how did the company perform? Earnings came in at $4.64, well ahead of my estimate, while the shares recently closed at $160.41, again well above my estimate.

Looking at the fourth quarter, the company’s gross margin was 55.2 percent as compared to 56.0 percent in the prior year fiscal quarter.  For its full fiscal year, gross margin was 55.1 percent as compared to 56.2 percent in the prior fiscal year.

Selling, general and administrative expenses were up 5 percent in the fourth quarter to $29.7 million when compared to the prior year fiscal quarter and up 6 percent to $121.4 million when compared to the prior fiscal year.

Advertising and sales promotion expenses were up 23 percent in the fourth quarter to $6.5 million when compared to the prior year fiscal quarter and for the full fiscal year they were up 9 percent to $22.3 million when compared to the prior fiscal year.

However, fourth fiscal quarter saw net income and earnings per share positively impacted by a $7.1 million provisional tax adjustment associated with the Tax Cuts and Jobs Act which caused the effective income tax rate for fiscal year 2018 to be approximately 13 percent.

Because of that adjustment the company exceeded the guidance issued in July of 2018. That low tax rate is not expected to carry into fiscal year 2019.

Looking ahead into fiscal 2019, management has estimated sales growth of between 4 and 7 percent with net sales expected to be between $425 million and $437 million. Gross margin percentage for the full year is expected to be near 55 percent. Advertising and promotion investments are projected to be between 5.5 and 6.0 percent of net sales.

With a projected income tax of between 21 and 22 percent net income is projected to be between $62.2 million and $63.2 million with earnings per share coming in at between $4.51 and $4.58.

WD-40 is a good example of a staple buy-and-hold success story, one where success likely comes from adding to holdings on a meaningful pullback. While there is substantial potential to the upside, it will come slowly. In other words, the next 20 years will resemble prior 20 years.

The intrinsic value of the shares, using the conservative free cash flow to the firm model, yields an intrinsic value of $194 per share. My earnings estimate for fiscal 2019 is $4.55 per share, with a 12-month target price on the shares of $176 for a 10 percent capital gain. There is also an indicated dividend of $2.16 or 1.33 percent.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.