WD-40 Company: The High Return Behind the Blue and Yellow Can
California-based WD-40 (NASDAQ:WDFC) manufactures household and multi-use products, including its namesake brand, which contributes to over 85% of its total sales. The iconic WD-40 Multi-Use (nearly 80% of fiscal 2019 revenue) had been the company's sole product for more than four decades. WD-40 stands for "Water Displacement perfected on the 40th try" and has become a truly household name in the US. For the latest twenty-some years, the business evolved and expanded its offerings through both research and development activities and the acquisition of several brands worldwide, based on the core concept of "creating positive lasting memories."
With approximately 500 employees, the $2.55 billion market-cap company distributes its products to more than 176 markets worldwide and through over 62 unique trade channels, including home center, warehouse store, locksmith, office supplies, plumbing, sporting goods, body shop, and janitorial. As of fiscal 2019, the Americas (including the US) accounted for roughly 46% of total sales, followed by EMEA's 38% and Asia-Pacific's 16%.
The original formula for WD-40 Multi-Use came from a chemist's 40th attempt to create a compound preventing rust and corrosion in the 1950s. Today, the ingredients and process for making the product are kept a top-secret - think about Coca-Cola (NYSE:KO) here. According to the official website, "only a single person in the entire world knows the exact ingredients that go into the famous formula that goes into the blue and yellow can."
The company describes the WD-40 Multi-Use as a "toolkit in a can," thanks to over 2,000 documented uses of the maintenance product, such as lubrication, rust prevention, penetration, cleaning, moisturizing. One should have some difficulties in finding a product that directly competes with WD-40's powerful and secret formula. The management estimates the potential global market opportunity for WD-40 Multi-Use to be a bit over $1 billion, which is enough runway for further growth of the business but too small for a global conglomerate to enter the space and compete. At the same time, the economies of scale at WD-40 result in a cost advantage that potential market entrants would struggle to match.
We should also appreciate the management's niche focus on its circle of competence. The company's IR materials explicitly pointed to "loss of focus," "not being deliberate and focused," and "temptation to 'di-worsify'" as some of the most significant risks to the business and even frequently quoted Warren Buffett (Trades, Portfolio)'s classic remarks below -
"You have to stick within what I call your circle of competence. You have to know what you understand and what you don't understand. It's not terribly important how big the circle is. But it's terribly important that you know where the perimeter is"
As indicated below, WD-40 generated consistently high returns on assets for the past two decades, roughly matching the performance of Clorox (NYSE:CLX), a mid-size category player, while outperforming Church & Dwight (NYSE:CHD) as well as Proctor & Gamble (NYSE:PG) and Unilever (NYSE:UN) (NYSE:UL) - the two global fast-moving consumer goods conglomerates.
Looking forward, we note that the continuous penetration of WD-40 branded products across the global markets can be a significant growth driver, alongside some organic supports from product innovation and digital channels and possible acquisition opportunities. The management openly targets a return on invested capital of more than 25% and a mid-to-high-single-digit sales growth as part of the capital allocation strategy.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Clorox.
This article first appeared on GuruFocus.
