Overcoming Hurdles: This Stock is Ready for New All-Time Highs

Key Points

• Hurdles remain for WD-40 Company, but it is tracking to set fresh highs.
• The company reported a beat-and-raise quarter, affirming dividends and distribution growth outlook. 
• Institutions and short-sellers are battling over the stock price direction; institutions will likely emerge as winners. 

WD-40 Company NASDAQ: WDFC is a healthy, value-building company whose stock price has struggled, providing ample opportunities for investors to buy in. Hurdles remain, including high interest and inflation, but the stock price is set to rise over the coming quarters and is on track to set a new high. It will set an all-time high because of its healthy and reliable growth, margins, cash flow, and capital return. The company has paid a dividend every quarter since 1990 and made regular increases since 2005, a trend that is expected to continue. 

The balance sheet and share repurchases are among the details supporting the outlook for distribution growth. The company operates with a fortress balance sheet that has increased in strength in recent quarters. Highlights from the Q3 report include a decline in cash and inventory offset by increased receivables, total assets, debt reduction, and reduced liability. Debt is low at 0.2x assets, 0.38x equity, and less than 2x cash, leaving it with ample cash flow for share repurchases. The company is not making robust repurchases but has set itself up to offset the dilutive impact of share-based compensation.

WD-40 Company Rises on a Beat-and-Raise Quarterly Report

WD-40 Company had a solid Q3, showing that its diversified product line and marketing strategies continue to resonate with consumers globally. The company reported $155.05 million in net revenue, a gain of 9%, which outpaced the consensus estimate reported by MarketBeat. 

Strength was driven by the core maintenance products segments, which grew by 10% and led segmentally due to an 11% gain in the original WD-40 product and a 13% increase in specialty. The “other” and harvest cleaning products segments declined but are a small portion of revenue. The harvest products are a high-margin segment but are an increasingly smaller portion of the business and are likely to be divested. Highlights from the report include positive progress in that regard. 

Other critical details about the revenue include robust volume increases and sales growth in all regions. The Americas, which accounts for about 50% of the revenue, grew by 6%, led by strength in Latin America. Latin America is an increasingly hot market driven by economic development and the rapidly expanding middle class. EIMEA and APAC, which account for 38% and 14% of revenue, respectively, grew 13% and 14%.

Analyst Trims Target for Undervalued WD-40 Company

WD-40 Company is a highly valued stock trading company at 42x this year’s earnings and 37x next year’s, but there is a reason for the high price tag. The company is a cash-generating machine that requires little capital to operate and returns a large portion of earnings to investors. The money left over is used to reinvest in growth, which pays off over time. The dividend is reliable and compounded by an ultra-low -0.07 beta that suggests virtually no correlation to the broader market. 

At least one analyst thinks the stock deserves a higher price. MarketBeat.com tracks only one analyst, which shows a low conviction from that quarter but is bullish. The team at DA Davidson lowered its price target but reiterated its Buy rating, assuming a move to $303 or a 35% upside from current price levels. 

Institutions and Short-Sellers Fight for Control of the WDFC Market

The technical action is mixed. The market surged on the news, but the gains were quickly capped. The takeaway is that support is solid and rising, but hurdles remain for the market. Support is in the form of institutional investors, who have bought on balance for many consecutive quarters and ramped their activity in the first half of this year. Strong resistance is in the form of short-sellers whose interest was above 10% at the last report. They are selling near the 150-day EMA and may cap gains. The 150-day EMA is a likely trigger point for short-covering; a more substantial rally can form if the market can get above that level.