Can High Yield Oil-Dri Shake Off Its Inflation Woes?

Strong Results From Oil-Dri Overshadowed By Inflation

If we are reading the report from Oil-Dri Corporation NYSE: ODC correctly, the price of kitty litter and many other sorbent mineral products are about to get a lot more expensive. The company produced a strong quarter and record results but results that were deeply impacted by rising prices the company admits it was slow to fight. What this means is that consumers of Oil-Dri products, which range from the agricultural market to sports, industrial, and home use are about to see another significant increase in their input costs. While bad news for the economy at large it's good news for Oil-Dri Corporation investors because margins should recover and help sustain the dividend.

Record Results And Significant Headwinds For Oil-Dri Corporation

Oil-Dri Corporation ultimately had a good quarter if one that was severely impacted by systemic headwinds throughout the supply chain. Ironically, as a part of the global supply chain and an input cost for many other businesses, issues plaguing companies like Oil-Dri Corporation are causing a negative feedback loop in the system that is ultimately hurting business more. Regardless, the revenue of $78.12 million is up 20.5% over last year and set a company record. Sales were strong in both the B2B segment and the retail segment with revenue up 13% and 26% respectively. 

Daniel S. Jaffee, President and Chief Executive Officer, stated, “Our performance in the fourth quarter and fiscal year 2021 was disappointing despite tremendous top-line growth with record-high consolidated net sales for both periods. Our profitability was greatly reduced due to significant cost inflation across all input channels … it is clear we did not keep up with the rapid pace of inflation.”

Moving down the report, gross margins declined by 200 basis points due to the rising impacts of inflation. The cost of goods sold rose by 700% and was only partially offset by a 24% decline in SG&A expense. The company specifically states input costs are up for resin, lumber, freight, natural gas, materials, and other supply chain issues related to capacity and labor market shortages. In regards to earnings, there were significant changes to accounting and other non-comparable influences that, when combined with rising input costs, caused net income to plunge by 90% on a quarterly YOY basis. On a full-year basis, the adjusted earnings for fiscal 2021 are up 10% versus the previous year and growth should continue in tandem with pricing actions we expect to see in the next report. 

Oil-Dri Corporation 3% Yield Looks Safe, For Now 

Marketbeat.com data shows Oil-Dri Corporation is a micro-cap company with a safe-looking 3% yield. The company's payout ratio is running about 50% of TTM earnings and is backed up by an 18-year history of dividend increases as well as a very strong balance sheet. The company's cash balance fell versus last year due to rising input costs and the payout of bonuses but so did the company's debt. The balance sheet remains net cash and is only very lightly levered with ample coverage and free cash flow. The company has only been raising the dividend at a 5% CAGR so we aren't expecting a big increase but increases are still in the forecast assuming product price increases pass through to the consumers.

The Technical Outlook: Range-Bound Oil-Dri Well-Supported

The one thing we can say about the Oil-Dri Corporation chart is that it's been trading in a narrowing range for years and appears to be well supported above the $32.50 level. Price action may move lower in the near term but we would expect it to bounce from the $32.50 level if not from the $34 level first. Longer-term, if Oil-DriCorporation can get its pricing in line with inflationary cost increases the stock could break out of the range and move higher.