WD-40 Company Got Hammered By COVID

WD-40 Company (NASDAQ: WDFC) had about as good a quarter as can be expected given the circumstances, and that has the stock set up for a rebound. The market in WD-40 Company stock has been in a protracted downtrend for several quarters now, and it is overextended and ripe for a reversal that could begin by the start of the 4th quarter. The primary factor we see moving the market higher is China. Sales in the Asia-Pacific and specifically China were deeply impacted by COVID-related shutdowns that may also impact the business quarter. Looking forward, however, the lockdowns in China will ease and lead to a rebound in sales that should be compounded by improving margins. That's not the outlook we see for high-profile growth names like Netflix (NASDAQ: NFLX), which are being squeezed by competition and rising costs. 

“Unfortunately, we continue to face a challenging inflationary environment and our third quarter gross margin came in at 48%, reflecting significant increases to our cost of products sold,” CEO Garry Ridge told analysts during the conference call. “Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief.

Margin Comes Into Focus For WD-40 Company Investors

The company’s margins eroded over the past year as rising inflationary costs cut into the bottom line. Still, the takeaway is that company efforts are underway to mitigate those impacts. The primary driver of margin improvement will be pricing increases, but macro factors are also in play. Among those is the rising dollar which is cutting into the top and bottom-line results, but we see central bank activity in Europe and Asia offsetting dollar strength in the mid to long-term.

“We are not sticking our head in the sand and ignoring the macroeconomic, geopolitical, supply chain, and inflation concerns that exist in the market today. We continue to actively manage our supply chain as we implement various initiatives to increase the capacity and flexibility of our supply chain for the long term,” CFO Jay Rembolt said. “In tandem with these efforts, we have been implementing strategic price increases across all segments in response to the increased costs we continue to experience.”

Short-Sellers And Institutions Fight Over WD-40 Company

Short-selling has had no small part in the decline in WD-40 Company shares, and it may keep price action under pressure in the near term. The short interest was over 12% at the last report, and the new guidance did little to change that scenario. The caveat is that earnings and guidance weakness was already a possibility, which means the outlook may already be priced into the market or close enough for a bottom to form. In regards to the institutions, the institutions have been net buyers of the stock every quarter 6 of the last 7 quarters, ever since the post-pandemic peak was formed, and they are buying in Q3 as well. The activity is light on a quarter-to-quarter basis but has the total ownership up to 90% and growing. 

And the analysts? There are only two analysts covering the stock with commentaries relevant to today’s opportunity. One issued a report the day after the guidance was released and rated the stock a Sell; the other came out a few days later and upgraded the stock to Buy from Neutral. Turning to the chart, the price action is in a downtrend but may have hit bottom at $164. The $164 coincides with two major support targets, one of which is the pandemically-induced bottom. Don’t forget, WD-40 Company business is up 25% from 2020 and 9% from 2019 with growth, strong cash flow, healthy dividends, and share repurchases in the forecast.