Over the past six months, WD-40 has been a great trade, beating the S&P 500 by 6.1%. Its stock price has climbed to $227.54, representing a healthy 11.4% increase. This performance may have investors wondering how to approach the situation.
Is now still a good time to buy WDFC? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why does WD-40 spark debate?
Short for “Water Displacement perfected on the 40th try”, WD-40 (NASDAQ:WDFC) is a renowned American consumer goods company known for its iconic and versatile spray, WD-40 Multi-Use Product.
Two things to like:
1. Elite gross margin powers best-in-class business model
All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.
WD-40 has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 55.2% gross margin over the last two years. That means for every $100 in revenue, only $44.81 went towards paying for raw materials, production of goods, transportation, and distribution.
2. Excellent free cash flow margin boosts reinvestment potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
WD-40 has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the consumer staples sector, averaging 13.8% over the last two years.
One reason to be careful:
Fewer distribution channels limit its ceiling
With $688 million in revenue over the past 12 months, WD-40 is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.
Final judgment
WD-40’s merits more than compensate for its flaws, and with its shares beating the market recently, the stock trades at 33.7× forward P/E (or $227.54 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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