Business

Saturday 20 October 2018

WD-40 has fixed 'squeaky hinges' to generate profits

While net sales over the last five years have increased marginally, net profits over the same period have increased more than 30pc to $53m last year. Stock image
While net sales over the last five years have increased marginally, net profits over the same period have increased more than 30pc to $53m last year. Stock image

John Lynch

Some men regard themselves as "handy". It is a broad concept, running from the ability to change a light bulb to the expertise required for completely revamping an old Morris Minor.

Being at the light bulb-changing end of that spectrum, I'm a believer in the handyman dictum that if it moves and it shouldn't, the answer is duct tape.

However if it should move and it doesn't, then the answer is WD-40, the product produced by the American company we have under the microscope today.

By way of explanation for those lucky enough never to have to do any repairs around the house, WD-40 is an oily spray or solvent that gets into the mechanical parts of indoor or outdoor goods and appliances and gets them functioning again.

Handymen love it, but so too do handywomen because it takes so much "muscle" out of domestic repairs.

It is the go-to product if you want to get the squeaks out of hinges.

WD-40 is yet another one of those inventions that came out of the space race but it is now a product with a global footprint and finding a home in workshops and factories around the world.

The San Diego, California-based group which produces the stuff never patented the product but the secret of the contents in the blue and yellow can with the little red top are safely locked in a bank deposit box.

Produced first in the early 1950s, it was developed by the Rocket Chemical Company (later renamed WD-40) to protect the outer skin of the Atlas missile from rust and corrosion.

Later it was found to have many, many other uses, never imagined by the company, such as removing dirt and crayon marks on walls and even protecting the Statue of Liberty from the elements.

The company has a number of products based on the original WD-40, which is its main revenue earner. Recently it developed WD-40 (bikes) which is a line of products for bicycle maintenance.

It also has a line of specialist products including rust removal, gel lubrication, water resistant lubricants and a specialist grease product to give machines a defence against soaring temperatures.

WD-40 prides itself that it is not dependent on any one customer, trade channel or country. North and south America represent half of all sales at $185m (€158m).

Following four consecutive years of growth, sales in the region declined slightly in 2017. Europe, the Middle East and Africa account for 36pc of total sales at $137m.

Last year, the group experienced uncertainty in Europe, particularly the UK.

The Asia/Pacific region is the group's smallest with sales of $57m. This market comprises both developed and emerging markets and the company plans to drive its core product WD-40 in these emerging markets.

Since so many of its products are based on the WD-40 formula and the company has a widely recognised brand, it is under no pressure to spend on capital investment, advertising, or R&D to maintain its leading market position.

As a result, its average return on invested capital over the past decade has not fallen below 12pc.

The company has a strong balance sheet and an ability to consistently generate attractive returns. While net sales over the last five years have increased marginally, net profits over the same period have increased more than 30pc to $53m last year.

Sales in the fiscal year 2017 were flat at $380m and a market value of $2bn and a dividend yield of 1.5.

The shares trade just below its yearly high of $150, up almost 50pc on the year, and trade at an elevate price earnings multiple 40.

Investors are pleased that the dividends increased for the seventh consecutive year and the company bought some shares back.

WD-40 is a company that can produce higher profits by building on existing brands and products. This is often referred by academics as "economies of scope".

The process can help to lower unit cost and generate stronger returns of capital. WD-40 is a classic example of a company that has capitalised on this principle. Interesting company worth considering, but its shares carry an exchange risk.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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