Expanding Into High-Potential Markets Like China And India Will Unlock Future Opportunities

Key Takeaways

• Strategic expansion in high-potential markets like China and India indicates significant revenue growth opportunities, leveraging an expanding distribution network.
  
• Focusing on high-margin maintenance products and divesting non-core brands may streamline operations and enhance net margins.
  
• Rising expenses and foreign exchange risks could pressure margins and earnings amid uncertain divestiture plans and credit loss concerns.

Catalysts

Develops and sells maintenance products, and homecare and cleaning products in North America, Central and South America, Asia, Australia, Europe, India, the Middle East, and Africa.

• The transition to a direct market model in Brazil and Mexico is expected to drive significant revenue growth, with Brazil anticipated to become a $20 million-plus market within 3-5 years, positively impacting future revenues.
  
• The focus on premiumization and aiming for a greater than 10% compound annual growth rate in sales of premium products like Smart Straw and EZ-REACH suggests potential for enhanced revenue and improved gross margins.
  
• Strategic emphasis on high-potential markets such as China, India, and Indonesia indicates a significant opportunity for revenue growth, supported by expanding distribution and market presence.
  
• Divestiture of non-core homecare and cleaning brands is expected to streamline operations and potentially enhance net margins by focusing resources on higher-margin maintenance products.
  
• Efforts to achieve 55% gross margin, possibly accelerated by supply chain cost initiatives and favorable shifts in product mix, are likely to improve earnings.

WD-40 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WD-40's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $91.2 million (and earnings per share of $6.57) by about January 2028, up from $70.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 50.2x on those 2028 earnings, up from 45.2x today. This future PE is greater than the current PE for the US Household Products industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

WD-40 Future Earnings Per Share Growth

Risks

• The anticipated divestiture of the homecare and cleaning business may not occur as planned, affecting future revenue if the sale doesn't proceed smoothly.
  
• Fluctuations in foreign exchange rates could negatively impact net sales and earnings, particularly within the Americas with currencies like the Mexican peso and the Brazilian real.
  
• Rising costs associated with warehousing, distribution, and freight could increase expenses and pressure gross margins, affecting earnings.
  
• A bankruptcy of a customer in the Americas had an $800,000 impact, highlighting risks of credit losses that can affect net income and operating income.
  
• The expectation of financial goals such as achieving a 55% gross margin by fiscal 2026 relies on variable factors, including cost environment and supply chain initiatives, potentially impacting earnings if not met.

Valuation

• The analysts have a consensus price target of $296.0 for WD-40 based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $733.4 million, earnings will come to $91.2 million, and it would be trading on a PE ratio of 50.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $236.13, the analyst's price target of $296.0 is 20.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.