Geographic Expansion And Premium Products Will Strengthen Future Market Position

Key Takeaways

• Strategic geographic expansion and direct market model adoption in emerging markets bolster revenue growth and operational efficiency.
  
• Premiumization and digital focus enhance profit margins while divesting low-margin units sharpens focus on high-margin products.
  
• Potential divestitures, currency risks, and higher SG&A costs, alongside macro-economic challenges, could impact profitability, revenue growth, and sales targets.

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.

• WD-40's strategic focus on geographic expansion, particularly in emerging markets like Brazil, India, and China, presents a significant growth opportunity. This expansion can drive substantial revenue growth as they penetrate these markets further.
  
• The shift to a direct market model in Brazil, following a successful transition in Mexico, has already shown strong sales performance. This operational change can enhance net margins by eliminating intermediary costs and improving supply chain efficiencies.
  
• The ongoing premiumization strategy, including products like WD-40 Smart Straw and EZ Reach, is expected to boost revenue growth and gross margin expansion. This enhances higher profit margin sales, impacting overall earnings positively.
  
• Divestiture of the less profitable home care and cleaning business allows a sharper focus on high-margin maintenance products, which can improve gross margin by approximately 60 basis points and enhance overall profitability.
  
• WD-40's enhanced focus on digital commerce, including the Repair Challenge campaign, is expected to drive sales growth and improve operating margins by leveraging digital efficiencies and expanding the customer base globally.

WD-40 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WD-40's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $91.0 million (and earnings per share of $6.75) by about December 2027, up from $69.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 51.1x on those 2027 earnings, down from 51.6x today. This future PE is greater than the current PE for the US Household Products industry at 25.7x.
• Analysts expect the number of shares outstanding to decline by 0.18% 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 home care and cleaning product brands in the Americas and the UK could lead to an immediate positive impact on gross margins, but if delayed or unsuccessful, it could negatively affect profitability due to the continued lower-margin sales from these segments. This may affect overall net margins.
  
• Currency risks, particularly with the change of the functional currency for the EIMEA trade block from pound sterling to euro, could introduce volatility in financial results, impacting reported earnings due to currency fluctuations.
  
• Elevated SG&A costs due to investments in ERP implementation, Brazil business model transition, and potential inefficiencies from divestiture processes could compress operating margins, affecting profitability.
  
• Increased competition or failure to achieve growth targets in key emerging markets like China, India, and Brazil could negatively impact projected revenue growth, affecting the company's ability to reach anticipated sales targets.
  
• Macro-economic factors such as potential inflationary pressures, shifts in global supply chain dynamics, and potential changes in consumer spending patterns could disrupt sales growth and increase product costs, thereby affecting net income and earnings projections.

Valuation

• The analysts have a consensus price target of $301.0 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 2027, revenues will be $734.0 million, earnings will come to $91.0 million, and it would be trading on a PE ratio of 51.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $264.4, the analyst's price target of $301.0 is 12.2% 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.