Tag: WDFC

Quick Recap on $WDFC Q4: GMs +400bps sequentially. Europe main disappointment. No change to thesis.

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Quick update of WDFC, doubt I do this often, but they reported so soon after I wrote on it I thought I’d give some thoughts. We’re seeing the green shoots of recovery on margins, but EMEA was weak, much more than expected. All in all, nothing changed in my thesis, but I’ll expand.

Maintenance sales (their core product) declined about 30% in EMEA. That’s stark for a business that was resilient in 2008. It would have been just 15% FX-neutral and they did exit some Russian and Belarus business, but still. It was only down 1% in the Q ended Aug. They sell through distributors in the EU, so no surprise in the face of uncertainty, distributors are destocking.

As such, EBITDA missed my estimate by about $5MM ($23MM vs. $28MM) solely due to this. GMs even beat my estimate by about 50bps. And mgmt basically said they have no change to their expectations, which is a second-half story. Normally I take the under on any second-half story, but this one makes complete sense.

I reviewed the “cost of a can” to see what is really driving the margin erosion. Basically 65% of a WD-40 can is either related to oil or tin. While packaging doubled in $s, the real needle movers are the chemical inputs, can, and manufacturing fees. These manufacturing fees are essentially warehousing and freight costs.

I think all of these will be tailwinds in second half.


Plus, China sales grew 22% on the maintenance side and 32.5% in APAC-ex China. So that is a good sign and probably more room to run as China re-opens.

Outside of that, last thing I’ll highlight is they have way too much inventory. They should destock themselves. But anyway, I expect that’ll be a 2H cash source. Could be up to $85MM, honestly. That may seem small, but it ain’t nothing for a company I expect to recover to $120MM+ EBITDA plus have a cash release like that.

 

Never a “good” time to own $WDFC, but now might be “OK”

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I wrote up WDFC stock in 2021. The inspiration was wanting to know why TF WDFC stock always traded at such a rich multiple. Persistantly. It would not have been a good short leading up to that time. Is everyone who hates it missing something in the numbers? At the time WDFC stock was trading around $300/share at 35x LTM EBITDA and 52x LTM EPS. Now it is more like $165, so if you could’ve top ticked it, good for you.

It was a good exercise. It’s easy to discard a stock simply by looking at the multiple and saying “nope too high”, when I think we can all agree we’ve bought companies with low P/E multiples and really regretted it, too.

Anyway, my conclusion was it was a really good brand, great business with super high ROIC, long-growth runway that required little capital. Pristine balance sheet… too pristine if you ask me….

Plus, its been highlighted before, that WDFC stock has some particular things going for it.

Setting all that aside, I couldn’t make the numbers work to meet my return threshold. In other words, a business can have a high return on its capital, but if I pay too much for that invested capital, my return will suck. the company has some long-term targets I thought they had really low chance of hitting based on their trajectory. I still think that’s the case, but the company has started to talk those down.

So it wasn’t a good time to buy. But I also pointed out WDFC stock never looked great to buy, but somehow you could’ve earned a >10% return buying at many points in the past when it looked expensive.

I’ll re-post that chart here – red line is where you could buy it 3 years before the current date, dotted orange is where it needed to be for 10% CAGR. Blue line is where it was. In other words, you could buy it below that price much of the time and it ended up being much higher in the end. 

Now with the stock at ~$165, I think it is actually an OK time to buy. I won’t rehash everything I did in the first post. This time it comes down to a 3 basic ideas:

  • Earnings are depressed from a price / raw material mismatch (this is true for many specialty chemical companies, such as Sherwin-Williams, PPG, etc). Price is flowing through now at the same time raw materials are collapsing. Earnings estimates look too low, in my opinion.
  • China is a growth story LT. It is still a small segment. Re-opening will help drive higher growth perhaps faster than people expect.
  • Last but not least, it is a great business and you have to pay up for quality. I’ve quibbled with execution in the past, but it does have a long growth trajectory (how is China only $20MM of revenue??).

I’m not sure what is exactly in WD-40, but I know it is a lot of oil derivatives.

Here is how true specialty chemicals typically work (and footnote- this is kinda what caused Sherwin Williams to re-rate, among other things).

  1. They are typically resilient businesses with pricing power and their customer doesn’t keep track of their raw materials and keep an index of inputs to change price (i.e. not a commodity)
  2.  In an benign environment, should grow volumes GDP+ and get price too
  3. However, if oil spikes, there can be a mismatch in raws and price, compressing margins
  4. BUT what specialty chem players do is they get MORE price to cover raws and when they fall again, they never lower price.

So what happens? True specialty chemical players may realize some compressed margins short-term in an oil spike, but long-term they reset higher. 

You can kind of see that play out for WDFC gross margins over time. It tends to move inverse with oil, but then reset higher:

In their fiscal year 2022 (ended August) they realized nearly 500bps of gross margin compression. Their long-term target is >55% gross margins, and they did 49% in ’22 when they had just done 54% in ’21. They break down more of the headwinds here, but keep in mind each of these have turned to tailwinds now and the company likely won’t be lowering price.

They go on to say they have implemented significant price increases that will recover margins over time. And yet, when you look at street expectations, they don’t have them getting back to slightly-below 54% gross margins until 2024. To be fair, 2023 guidance from management is wide – anywhere from 51%-53%.

The low end doesn’t seem right to me and is meaningfully different outcome. The low end doesn’t seem right based on their comment that a ~25% price increased went into effect late-2022. They also already had some margin benefits from price coming through, though they were masked.

They also say they will be implementing these across geographies.

So you’ve got all this price coming through, right when raw materials are falling. Sure, we may be in a recession in 2023, but that’s a big maybe too. I’m at ~$6.85 of EPS and the company guided to $5.15 for 2023… I only model 5% volume growth (big price increases result in some elasticity plus weaker market).

Again, history shows they regain this margin and then some…


Moving on to keep this short.

The other thing about this company is China. APAC in total for WDFC is <$75MM. I don’t see why this geography couldn’t be well above $200MM (Europe and North America are $200MM and $240MM).

There’s a lot of squeaky, rusty stuff in Asia too.

So I can’t say when, but that seems inevitable if they can get the branding and distribution right. Which they clearly haven’t so far.

But the CEO who had been there for forever just retired. They brought up an insider so not totally optimistic, but at least you know things won’t be shooken up too much.


In sum, I think at we’re at a much more reasonable point optically on valuation (24x my 2023 EPS), but again EPS doesn’t matter. What does matter is FCF per share is likely going to go grow double-digits for essentially a consumer staple where estimates are too low and the required capital to grow is very limited.

That seems like the set-up for a winner. I fully accept being “early” on this one.