Streetwise for Sunday, October 29, 2017
A key element in the analysis of any company’s investment potential is the deference it has for its shareholders. Corporations that rank high on your investment list should respect their obligation to place the well-being of shareholders and employees above that of its executives. Unfortunately, executive compensation often points to a shirking of this responsibility.
While no one wants to stifle initiative, hard work, and the associated monetary rewards, consider the ramifications to corporate morale when rising executive compensation collides head-on with layoffs and pay reductions, such as we saw at Wells Fargo.
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. 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. A good 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.
About as many people use the product as subscribe to cable TV. This is higher household penetration than that of Coca-Cola, Gillette razors or most any other dominant household consumer brand.
When I last wrote about the company a year ago, my earnings estimate for fiscal 2017 was $3.46, with a 12-month target price on the shares of $122 for a 10 percent capital gain. So how did the company perform? Earnings came in at $3.72, well ahead of my estimate, while the shares recently closed at $108.70, well below my estimate. So where was the problem?
Sales for the fourth quarter were $96.6 million, a decrease of 1 percent compared to the prior year fiscal quarter, while for the full fiscal year sales were $380.5 million, a decrease of $0.2 million compared to the prior year fiscal year.
Net income for the fourth quarter was $14.4 million, an increase of one percent compared to the prior year fiscal quarter. For the full fiscal year net income was $52.9 million, also an increase of 1 percent from the prior fiscal year.
Earnings per share came in at $1.01 in the fourth quarter, as compared to $0.99 per share a year ago. Year-to-date earnings were $3.72 per share as compared to $3.64 in the prior fiscal year.
The company’s gross margin was 56.0 percent in the fourth quarter compared to 57.4 percent in the prior year fiscal quarter. Full fiscal year gross margin was 56.2 percent compared to 56.3 percent in the prior fiscal year.
Selling, general and administrative (SG&A) expenses were down 12 percent in the fourth quarter to $28.2 million when compared to the prior year, while for the full year they were down 3 percent to $114.6 million compared to the prior fiscal year.
Advertising and sales promotion expenses were down 2 percent in the fourth quarter to $5.3 million when compared to the prior year and down 8 percent to $20.5 million when compared to the prior fiscal year.
Because of the somewhat lower revenue numbers, WD-40 shares have fallen nearly 4 percent since the beginning of the year. Nonetheless, the company’s future does look quite promising.
Management has indicated that its guidance for fiscal year 2018 calls for
sales growth of 4 to 6 percent or $396 to $403 million for the upcoming fiscal year.
Gross margin is expected to be near 56 percent. Advertising and promotion investments are projected 6.0 percent of net sales. Net income is projected to be between $52.9 and $53.8 million resulting in earnings per share number of between $3.81 and $3.87.
The intrinsic value of the shares, using the conservative free cash flow to the firm model, yields an intrinsic value of $171 per share. My earnings estimate for fiscal 2018 is $3.3.80, with a 12-month target price on the shares of $118 for a 10 percent capital gain. There is also an indicated 1.77 percent dividend yield.
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.RuddReport.com.