WD-40 Company Valuation Security Analysis Project

December 13, 2011 Finance 333_001

Brinsfield, James Dougherty, Kenneth Raja, Kevin Rojas, Orlando

BDRR & Associates, LLC.

Table of Contents
Section I: Business Environment ................................................................................................................................ 3 Business Lines ...................................................................................................................................................... 3 Breakdown of Sales, Revenue, and Assets ........................................................................................................... 5 Macro-economic Overview .................................................................................................................................. 7 Industry Outlook ................................................................................................................................................... 9 Firm Position ........................................................................................................................................................ 9 Economic Advantages ........................................................................................................................................ 12 Summary............................................................................................................................................................. 15 Section II: Valuation ................................................................................................................................................. 16 CAPM and WACC ............................................................................................................................................. 16 Risk-free Rate .......................................................................................................................................... 16 Market Risk Premium .............................................................................................................................. 17 Required Rate Calculation ....................................................................................................................... 17 Dividend Discount Model................................................................................................................................... 18 Discounted Cash Flow ........................................................................................................................................ 18 Industry Comparison .......................................................................................................................................... 19 Orlandos Section ............................................................................................................................................... 19 Section III: Valuation Conclusion ............................................................................................................................ 22 Intrinsic Value .................................................................................................................................................... 22 Return Estimate .................................................................................................................................................. 22 Recommendation ................................................................................................................................................ 23 Section IV: Appendix ................................................................................................................................................ 25 Balance Sheet ..................................................................................................................................................... 26 Income Statement ............................................................................................................................................... 28 Dividend Discount Model................................................................................................................................... 30 P/E Regression .................................................................................................................................................... 31 WACC Computation .......................................................................................................................................... 32 Discounted Cash Flow Model ............................................................................................................................ 33 DCF: Intrinsic Valuation Computation ............................................................................................................... 34 Industry Comparison .......................................................................................................................................... 35 Orlandos Excel .................................................................................................................................................. 36 Section V: References ................................................................................................................................................ 37

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SECTION I: BUSINESS ENVIRONMENT

A. Business Lines

WD-40 is a company with two distinct business lines: multi-purpose maintenance products and homecare and cleaning products. For much of the companys life, its sole business line was multipurpose maintenance products until it acquired Global Household Brands, a homecare and cleaning products business. It did this in 2001 in order to become more diverse and reach out into new markets. Even though the company now has several homecare and cleaning products, a vast majority of its business comes from its multi-purpose maintenance products. 80% of its sales came from its multipurpose maintenance products in 2010 (Standard & Poors, 2011). Multi-Purpose Maintenance Products The multi-purpose maintenance products it sells are WD-40, 3-IN-ONE, and Blue Works. These products purposes are to help maintain machinery and equipment to ensure a long useful life through lubrication, rust prevention, cleaner, and moisture displacement. In the letter to shareholders, one of WD-40s strategic initiatives is to increase its market share in the multi-purpose maintenance products sector. It states that during the next two years it is rolling out several new products. This initiative is to fill gaps in the market and get access to different distribution channels. Its newest product, Blue Works, is silicone based which gave it access to food grade market distribution channels, a channel that was inaccessible until now (WD-40 Company, 2010).

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Homecare and Cleaning Products The homecare and cleaning products it sells are X-14, 2000 Flushes, Carpet Fresh, Spot Shot, 1001, Lava, and Solvol. The products range from heavy-duty hand cleaners from its brands Lava and Solvol; carpet deodorizers and stain removers from its brands Spot Shot, Carpet Fresh, No Vac, and 1001; and toilet and hard surface cleaners from its brands X-14 and 2000 Flushes. Global Products Many of the companys brands were attained during acquisitions which lead to new distribution channels and markets. Products from WD-40 Company can be found worldwide because of acquisitions of global companies and products. Sales outside of the US accounted for 60% of total sales (Kaplan, 2011). This proves that the companys products are very successful in international markets. It also proves that the different brands travel through the right distribution channels to maximize exposure. Its products travel through industrial, hardware, grocery, warehouse club, home center, automotive, and mass retail distribution channels (WD-40 Company, 2010).

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B. Breakdown of Sales, Revenue, and Assets

The following table summarizes operating data for WD-40 operations (in thousands, except percentages and per share amounts):
Fiscal Year Ended August 31, Change Prior Year 2010 2009 Dollars Percent $258,095 $225,098 $32,997 15% $63,421 $66,904 ($3,483) -5% $321,516 $292,002 $29,514 10% $156,210 $147,469 $8,741 6% $165,306 $144,533 $20,773 14% $110,108 $104,688 $5,420 5% $55,198 $39,845 $15,353 39% $36,095 $26,287 $9,808 37% $2.2 $1.58 $0.57 36%

Net Sales: Multi-purpose maintence Homecare and cleaning Total net sales Cost of products sold Gross profit Operating expenses Ops income Net income Earnings per common share - diluted

Net Sales by Segment The following table summarizes net sales by segment (in thousands, except percentages):
Fiscal Year Ended August 31, Change Prior Year 2010 2009 Dollars Percent $179,867 $168,381 $11,486 7% $110,367 $97,518 $12,849 13% $31,238 $26,103 $5,135 20% $323,482 $294,011 $29,470 10%

Americas Europe Asia-Pacific

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Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Fiscal Year Ended August 31, Change Prior Year 2010 2009 Dollars Percent $129,834 $115,095 $14,739 13% $50,033 $53,286 ($3,253) -6% $181,877 $170,390 $11,486 7%
56% 58%

Multi-purpose maintenance products Homecare and cleaning products

% of consolidated net sales

Europe
The following table summarizes net sales by product line for the Europe segment (in thousands, except percentages):
Fiscal Year Ended August 31, Change Prior Year 2010 2009 Dollars Percent $102,195 $88,153 $14,042 16% $8,172 $9,365 ($1,193) -13% $112,377 $99,527 $12,849 13%
34% 33%

Multi-purpose maintenance products Homecare and cleaning products

% of consolidated net sales

Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):

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Fiscal Year Ended August 31, Change Prior Year 2010 2009 Dollars Percent $26,066 $21,850 $4,216 19% $5,216 $4,253 $963 23% $33,292 $28,112 $5,179 18%
10% 9%

Multi-purpose maintenance products Homecare and cleaning products

% of consolidated net sales

C. Macro-economic Overview

WD-40s products ranging from carpet cleaner, heavy duty cleaner and multi-purpose lubricants which places them in the household product industry. According to Seidman from Value Line, Household Products equities can be classified as defensive investments. Seidman explains how companies in the household product industry have the ability to provide solid downside protection in challenging periods, while performing well during great economic times. Seidman also includes that the industry is mature, and sales and earnings streams are relatively steady through the business cycle placing WD-40 in a great financial position.

In tough economic times, consumers will not stop purchasing household products, but look for products with the highest value. Braverman states The household products area remains very competitive, in our view, given the maturity of the industry in developed countries, and with various companies vying to capture market share in developing markets. One of the methods for expanding in such a competitive industry will be value, and tapping into the international market. Braverman later goes to conclude that economic growth and changing lifestyles in developing international markets should provide growth opportunities. Reassuring that international

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expenditure is imperative to grow as a company. Seidman says, the largest household product companies have long histories of acquisition and divestitures which is visible by the line of products WD-40 carries and has acquired over the past years.

In the year 2010, 44% of WD-40s sales came from the international market. Overseas expansion has given the opportunity to the WD-40 company to push sales and earnings higher than previous years. Seidman states, North America, Europe and the Asia/Pacific regions are the largest, most attractive markets, but they are generally mature and highly competitive giving US based companies reason to expand internationally. A drawback for international expansion for any industry according to Seidman is at any given time, changes to foreign currency exchange rates will either support or restrain reported sales and earnings growth. Too, companies with foreign production assets are subject to local political risk. Braverman expects emerging international markets demand for consumer products will raise, how do domestic companies gain foreign attention? Braverman believes that a number of companies continue to control costs effectively and are looking for additional ways to operate more efficiently which has been stated by Seidman as well to be succeed in the household product industry. Braverman states In the long run, partly due to the slow growth seen in developed markets, we think large multinationals will continue to seek growth opportunities in developing and emerging markets.

Throughout the current year, the S&P Household Products index rose 4.3% compared to the 3.5% drop for the S&P 1500 index as said by Braverman. As found in WD-40s annual report, part of WD-40s strategic plan for the upcoming quarters are to target Mexico and Brazil in the Americas market. In Europe, Russia and Turkey are the main countries to be seen with most growth opportunities. In Asia / Pacific, WD-40 plans to expand in China, India, Vietnam, and
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Indonesia. WD-40 gains 44% of sales through international markets, reassuring the importance of international expansion.

D. Industry Outlook

The industry the WD-40 Company operates in the Household Products sub-industry of the Consumer Staples sector. According to Loran Braverman, writing on behalf of Standard & Poors Financial Services, LLC, they have a neutral fundamental outlook for the household products subindustry for the next 12 months. He believes that unemployment will remain high and thus keeping consumers price-sensitive on household products. Successful marketing and product innovation will be necessary to keep purchasers from switching to lower cost products in this competitive industry. Also, many companies are looking inward to gain the competitive advantage through cost cutting measures. With the low-growth in the industry in developed countries, the multi-national companies are competing for market share in the developing countries as those are gaining in purchasing capabilities. The impact of the foreign currency translation on these companies will depend on how much the individual company has hedged and the interaction of that foreign currency with the USD.

E. Firm Position

WD-40 is a small company in an industry dominated by giants like Clorox and Kimberly-Clark. WD-40's market capitalization is in the millions while its competition is in the billions. WD-40s product offering are very specific. Its main two product categories are Multi-purpose maintenance
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products which includes its WD-40 brand and Homecare and Clean Products like the X-14 mildew cleaner. Its 2010 revenue was $322 million compared to Clorox and Kimberly-Clark which had revenue of $5,231 million and 19,746 million. (S&P) But given its small size, WD-40 is more adaptable then its larger competitors and with its growing international sales it should increase its revenues. 60% of its sales through May have been international with Europe being the biggest while Asia/Pacific sales are not trailing too far behind. (S&P) One of the benefits that WD has over the big boys is that it has very little in equipment and factory cost. To produce its products it partners with third-parties so it has very little equipment and factory cost. This allows them to invest more in R&D then the others since it does not have to worry about managing the factories that product its products. This also allows them to minimize cost since it can switch the manufactures for its products as needed. Currently Clorox operates over 38 manufacturing facilities and Kimberly-Clark owns over 112 worldwide. (Mergent) This makes these companies inflexible in the fast moving world market. Some of the risk factors for the company are the cost of its raw materials which could increase the cost of the final product. If it were to rise too much, sales would suffer. Its reliance of third-party manufactures could cause problems with logistics and if its relations with the third-party were to go sour, the company could run into problems manufacturing its product. Kimberly-Clark has four business segments Personal Care, Consumer Tissue, Professional/other and Healthcare. Combined they create total revenues of $19,737,000 thousand for 2010 with personal care being the biggest. Kimberly-Clark is currently facing the problem of rising operating costs and tightening supply of oil-based materials. For the rest of the year its margins may be tight even with the discretionary spending cuts. Clorox recently faced a forced acquisition attempt by Carl Icahn in which he offered up to $80 a share to buy the company outright. He also attempted

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to have Clorox auctioned off but this attempt failed. (Valueline) Its total revenue totaled to $5,534,000 for 2010 with its four segments of Cleaning, Household, Lifestyle and International with international being the biggest. For all the companies the Americas being the biggest although for Clorox most of its revenues come from the USA while the other two have a more international spin to its revenues. Since 2011, numbers for Clorox show that its revenues decreased this year to $5,231,000 from its 2010 numbers. (Mergent)

(Annual Report)
Above are the currents strategic initiatives for WD-40 Competition is strong in the developed market but there are still growing opportunities in the international and developing markets. It is currently in over 160 countries worldwide and is continuing to expand operations in many of those countries WD-40 is also actively looking for acquisitions to acquire new products and create new business opportunities. (S&P)

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F. Economic Advantages

WD-40 Company is one of the smallest companies in the specialty chemicals industry. It must directly compete with large companies like Mosaic Co., Johnson Matthey PLC, and Croda International PLC. WD-40 Company has a market capitalization of $633.37 million, whereas Mosaic Co., Johnson Matthey PLC, and Croda International PLC market capitalizations of 22.24, 3.85, and 2.39 billion, respectively. This means that WD-40 is from 3 to 35 times smaller than its main competitors. Although it may not have as much power over distributors and retailers as its competitors, it use its existing products, innovations to those products, global expansion, and business contracts to its advantage. Innovations WD-40 Company is seen as a mature company selling mature products; however, it is constantly reinventing its mature products. The company has created a special product development team, dubbed Team Tomorrow, to help create, reinvent, and test products. In 2010, the company invested $5.3 million on research and development (WD-40 Company, 2010).This was an increase of 10.42% and 47.22% from 2009 and 2008, respectively. The WD-40 lubrication was scrutinized for dropping the red straw delivery system on their aerosol cans. Most recently, Team Tomorrow took the criticisms and developed a Smart Straw delivery system which allows the user to choose between a straw or spray delivery. This is consistent with

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their belief that innovation and renovation are important to long-term growth of its brands (WD-40 Company, 2010). Contracts WD-40 Company does not actually produce any of its products. This allows it to free up cash that would have otherwise been invested in manufacturing assets. The company uses a limited number of third-party manufacturers to produce all of its products. The company admits that this adds risk to the operation because it cannot control the third-party manufacturers management. If there are disagreements or changes to the contracts, this could significantly impact the company. The company works with the raw materials suppliers throughout the supply chain to ensure the lowest cost burden to the consumer. Originally, WD-40 Company entered into short-term contracts with its supplier no longer than half a year, but in order to support innovation and new products, the company has looked into other sources of manufacturing (WD-40 Company, 2010). A WD-40 Company press release states, that it have entered into a three year credit agreement with Bank of America. This agreement is allowing the company access to $75 million dollars (WD-40 Company, 2011). The extra money will help the company continue to grow and aid in their share buyback action. Any contract that gives access to capital is an economic advantage over the competition. Even large companies can be revoked credit, so the fact that it is seen as creditworthy means that Bank of America does not foresee the WD-40 Company undergoing financial difficulty any time soon. Global Expansion and Business Relationships One the main strategies that WD-40 Company is adamant about is developing its business through acquisitions, joint ventures and/or other strategic partnerships (WD-40 Company, 2010).

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Acquisitions have been a clear strategy since the turn of the century. In 2001, the company acquired Global Household Brands, which included brands such as 2000 Flushes and Carpet Fresh. These acquisitions were made to diversify their business from solely multi-purpose maintenance products to the addition of homecare and cleaning products. The brand acquisitions have helped the company get into new markets. The acquired brands carved a way in existing distribution channels for the companys root products. This is somewhat alarming because in a span of eight years, WD-40 Company acquired eight brands and no brands have been acquired since 2004. So either it does not have the financial strength or it is no longer following one of its core strategies. It could also indicate that the company has shifted from acquiring products/ companies to developing them in house. According to the annual report, sales to Wal-Mart Stores accounts for roughly 10% of total net sales which is roughly $29.2 million (WD-40 Company, 2010). This business relationship is helpful because having a familiarity with Wal-Mart customers means that WD-40 Company products are entitled to shelf space when needed. Being a stable part of Wal-Marts inventory can keep other competitors from gaining access to them. Industry Regulation Requirements WD-40 is in an industry where regulations are imposed to protect the environment. The California Air Resources Board, has passed a law that prevents the selling of any product that has volatile organic compounds (VOC) above a certain amount. The current limit is at 50% VOCs but by December 31, 2015, the VOCs need to be reduced to 10% (Standards for Consumer Products, 2007). Specifically, this is targeted towards aerosols. WD-40 Company has several products that will be affected by the change including Spot Shot, Carpet Fresh, and No Vac.

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The company has been able to meet regulatory requirements without financial strain (WD-40 Company, 2010). A 40% change in a component of any product is a huge undertaking and the fact that it is able to reformulate several products without financial strain is impressive. Larger companies may or may not be able to achieve this new standard which already puts WD-40 Company in front of others. Patents According to the US Patent Office, WD-40 Company has 10 patents, ranging from bottles to liquid dispensers. Even though the company has several patents, its primary strategy is to gain sales through its brand names. Since the brand names are essential to the companys strategy, it relies on trademarks as a legal guarantee throughout the world on their ten major brands (WD-40 Company, 2010).

G. Summary

Despite experts outlook on the household products industry, WD-40 Company is finding ways of staying competitive. Since 2009, the companys total net sales grew by 10% or $29.5 million. The general economic conditions will keep consumers price-sensitive on household products. An assetlight organizational structure, third-party manufacturing, acquiring global brands to improve distribution channels, and product innovations are key strategies that are making the difference in these bleak economic times.

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SECTION II: VALUATION

Capital Asset Pricing Model (CAPM) and Weighted Average Cost of Capital (WACC)

It is necessary to calculate the firms intrinsic value to determine many things, but most importantly, whether the firm will yield a positive return for the investor. Intrinsic value can be computed by many different models, which will give different results. It is vital to not base any large investment in solely one model, which is why our team has conducted several tests through various models. Capital Asset Pricing Model The CAPM takes the time value of money and balances it with WD-40 Companys risk. The required rate of return is calculated by taking the riskiness of the security () and multiplying it by the market risk premium (Rm-Rf). Then you take the risk adjusted market premium and add the risk-free rate (Rf). The CAPM formula is Rrr= Rf + (Rm-Rf).

Risk-free Rate
The risk-free rate that our analysts used was the 10-Year interest rate of the Treasury Note as of November 7th according to Yahoo! Finance. The adjusted closing price for November 7th was 1.99%. The 10-Year Treasury Note was used instead of the 30-Year because it reflects the shorter time period that we are sampling and provides a more accurate risk-free rate.

Market Risk Premium

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Market risk premiums are difficult to calculate which is why we used the industry standard market risk premium source. The market risk premium was defined in the Market Risk Premium Survey by Pablo Fernandez. The average Market Risk Premium was 5.5% for the United States in 2011.

Beta
Beta is the risk factor which either amplifies or muffles the market risk premium in the CAPM model. By itself beta measures the volatility of the security compared to the market. We defined the market as the S&P 500. We used the adjusted monthly return of the S&P 500 and WD-40 Company from November 2006 to November 2011. The beta came out to 0.6864 which does not fall far from Yahoo! Finance beta of 0.55.

Required Rate Calculation

Rrr= Rf + (Rm-Rf) 1.99 + 0.6864(5.5) = 5.77%. Weighted Average Cost of Capital The required rate has many functions including being used to calculate the Weighted Average Cost of Capital. Our team took the total debt and divided it by the total value and multiplied it by the cost of debt multiplied by after-tax rate. Then we took the CAPM amount and divided it by the total value and multiplied it by the cost of equity. These items added gave us the WACC, which comes out to 5.6%.

Dividend Discount Model

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Growth Rate in Discounted Cash Flow Model I am assuming a growth rate of 3% as the growth rate for the previous 5 years has been 3.18% and the outlook for the growth is expected to stay right around 3% this according to the Valueline Investment Survey. DDM Valuation When using the Dividend Discount Model, several assumptions that must be made. These include interest rates will staying constant, dividends growing indefinitely and the payments will be consistent. This also includes that WD-40 Company has a growth pattern that stays constant.

Discounted Cash Flow Model

Growth Rate in Discounted Cash Flow Model The growth in sales used in the DCF model was derived from Value Line. The Value Line report estimated the growth in sales would be 5% for 2012. After taking that into consideration, we looked into the past sales growth. The past sales growth has fluctuated severely from as high as 10% to as low as -7.9%. This volatility keeps us from expecting high growth rates in sales in the coming five years. WD-40 Company is a mature company and will not experience high growth rates, unless the firm continues to acquire other companies, which it has not done recently. All of this influenced our estimates of growth rate in sales for the next five years. We estimate that the companys sales growth rate will peak in 2013 at 7% and steadily decrease to 4.5% indefinitely.
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DCF Valuation These assumptions for growth except for sales falls compared to the historical averages. This is because we want to stay conservative. The company is faced with very large multinational corporations. Since WD-40 Company is starting to venture in international markets, where other very large competitors products are, we can assume that growth will be harder to attain. We calculated the free cash flow directly from the companys financial statements that we obtained from the SECs EDGAR database. We calculated CAPEX and Working Capital directly from the balance sheets. The forecasted Free Cash Flows were discounted at N+.8333. This number was found by dividing the number of months between November 1st and August 31 (Fiscal Year) to come up with .8333 to give an accurate PV Factor.

Industry Comparison

The companies used for the industry comparison are as follows: Proctor & Gamble (PG) Colgate-Palmolive (CL) Kimberly-Clark (KMB) Clorox (CLX) Church & Dwight (CHD) Energizer Holdings (ENR)

Table 1: Industry Competition 19 | P a g e

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P/E Ratio Growth Beta PoR PEG Ratio EPS

Company Name

PROCTER & GAMBLE CO. (THE)

15.92

9.3 17.56 16.65 18.56 21.37 18.60

0.47 9.7 8.9 8.8 9.6 12.5

50.94 0.46 0.38 0.41 0.38 1.38

1.71 43.90 64.94 66.82 32.05 0

3.94 1.81 1.87 2.11 2.23 1.49 4.98 4.19 3.47 2.01 3.72

COLGATE-PALMOLIVE CO. KIMBERLY-CLARK CORP. CLOROX CO. (THE) CHURCH & DWIGHT CO., INC. ENERGIZER HOLDINGS, INC.

Comparable Average Comparable Median

18.11 18.06

9.80 9.45

0.58 0.44

43.11 47.42

1.87 1.84

3.72 3.83

WD-40

19.69

5.58

0.53

55.00

3.53

2.14

Data obtained from S&P and Yahoo Finance on 11/10/11

WDFC P/E is on the high end of its competitors but not the highest. Its growth is quite low at 5.58 compared to the others. This could be because it is in a very specific industry while the others are larger with more products and are in the more general consumer staples industry. There PEG ratio is one of the highest in the industry at 3.53 which shows that investors believe that WD-40 could possibly be overvalued since it is more than a full point above that average.
Table 2: P/E Regression
Expected Value Intercept Growth Beta PoR Coefficients 76.00 -5.26 5.88 -0.23 Factor 1.00 5.58 0.53 55.00 Component 76.00 -29.32 3.11 -12.50

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Exp. P/E Exp. Value $ 37.29 80.18

P/E Ind PEG Ind

$ $

38.83 33.64

P/E Regression Assumptions The Expected P/E will be 37.29 Expected Value at $80.18

The Beta, Growth, and POR used for my regression were acquired through the Dividend Discount Model. The expected P/E is quite high based on the current P/E of 19.69 and the industry average is at 18.11. Also the regression put the value of WDFC at $80.18 which is about double their current stock price. This growth would be hard to attain because WD-40 is a relatively small company in a market filled with huge multination companies as you can see above from the Industry Competition table.

DFC Forecast Assumptions Gross Margin SGA/Sales Operating Margin CAPEX/Sales Tax Rate 48 % 25.5% 20% 3% 33% As sales increases slightly we will assume the company will have to allow for more operating expenses. As sales increases, this will result in a slightly lower ratio. With the Gross Margin and SGA/Sales shrinking the operating margin will too become smaller. We will only see a minute deviation from the historical data. The tax rate was calculated from the past 6 years tax rate.

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The Terminal FCF equaled the 2016 Cash Flow multiplied by the growth rate divided by the difference in the discount rate and the growth rate. This was then discounted that the previous years discount rate. The present value of the firm was the sum of all the discounted FCFs plus the terminal FCF divided by the previous years discount rate. The value of the firm could then be found by adding the value of marketable securities and subtracting the market value of debt. The intrinsic Value of WD-40 Company based on the Discount Cash Flow Approach is $96.51 which is 127.95% higher than the current price of $42.34. This is a very clear indication that the stock is seriously undervalued and needs to be bought immediately.

SECTION III: VALUATION CONCLUSION

A. Intrinsic Value

The valuation models gave valuations ranging from $42.26 to $96.51. Our team has decided to use the Dividend Discount Model to give the intrinsic value for WDFC. We chose this model because it provides the best estimate towards the companys true value and it bases its value off of more metrics which we can assume gives a more accurate valuation. The Dividend Discount Model gave us an intrinsic value of $42.26. The last closing stock price was $39.82 (12/12/2011), which means that the stock is under-valued by $2.44.

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B. Return Estimate

As of December 12, 2011, the closing price of the stock was $39.82. This means that if one were to invest in the stock that they would experience a positive return of 6.13%, based on our models. If an investor were to purchase $1 million of WDFC, the investment would net a positive $61,275.74. The mispricing of the stock must be more permanent in nature because of the efficient market hypothesis. Our team believes that the market is semi-strong. We understand that all of the information we gathered is public and that the market adjusts immediately to any new information, so the stock price should have gone up to our intrinsic value already. Since the 200-day moving average of the security is $41.42 and our intrinsic value is $42.26, than that means that the security is permanently mispriced. Until the market realizes that it is mispriced and corrects to our intrinsic price, there is time to invest and make a profit.

C. Recommendation

Our recommendation is to buy WDFC because it is under-valued. After utilizing various valuation models to find the intrinsic value, we have found them all to come to that same conclusion. The DDM shows that the intrinsic value should be $42.12. The P/E Model shows that the intrinsic value should be $80.18. The DCF Model shows that the intrinsic value should be $96.51. Every valuation model shows WDFC as being undervalued.

WD-40 Company does not own manufacturing plants so its capital expenditure is low and it does not need many employees. The company needs employees for corporate and research and
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development because all it does is develops a products and then outsources the manufacturing to a third-party. The company has only 334 employees, so there are very little payroll costs. On the other hand, WD-40s competitors have thousands of employees. Church & Dwight has 3,600 and Clorox has over 8,100. This asset-light strategy means that WD-40 Company can operate with 24 times fewer employees than Clorox and Clorox is not 24 times larger. No employees mean more of the revenues can be put back into the company or given to the investors as dividends. Combine that with the cost savings it gets from not having to run a plant and it adds up to a sizable amount. Buy WD-40 Company is growing faster than the industry, year over year. Year over year, the companys quarterly revenue growth is 12.5% compared to an industry average of 7.8%. Since WD-40 Company is smaller than its competitors, it is easier for the firm to experience a higher growth rate. Company is an established company, the best of both worlds are found; growth potential of a small company with the stability of an established company.

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Appendix

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Balance Sheet 2002-2006 from S.E.C. Edgar Database

Fiscal Year Ended August 31 Assets Current assets: Cash and cash equivalents Short-term investments Trade accounts receivable Product held at contract packagers Inventories Current deferred tax assets, net Assets held for sale Other current assets Total current assets Property and equipment, net Goodwill Other intangible assets, net Investment in related party Other assets Total assets $ 2002 2003 2004 2005 2006

11,091 $ 0 43,754 2,135 6,143 2,400 0 2,140 67,663 6,196 92,725 36,650 5,402 6,409 215,045 $

41,971 $ 0 41,925 1,704 4,709 2,387 0 2,565 95,261 6,523 92,267 35,700 642 6,265 236,658 $

29,433 $ 0 40,643 1,975 6,322 2,830 0 3,026 84,229 7,081 95,832 43,428 932 5,273 236,775 $

37,120 $ 0 44,487 1,814 8,041 2,946 0 6,784 101,192 8,355 95,858 42,884 1,112 4,852 254,253 $

45,206 0 44,491 1,385 15,269 4,331 0 4,858 115,540 8,940 96,118 42,722 972 4,183 268,475

Liabilities and Shareholders Equity Current liabilities: Accounts payable Accounts payable to related party Accrued liabilities Current portion of long-term debt Accrued payroll and related expenses Income taxes payable Revolving line of credit Total current liabilities Long-term debt Deferred and other long-term liabilities Long-term deferred tax liabilities, net Total liabilities Shareholders equity: Common stock Additional paid-in capital Unearned stock-based compensation Retained earnings Accumulated other comprehensive loss Common stock held in treasury, at cost Total shareholders equity

15,871 $ 0 11,873 0 5,724 1,495 299 35,262 95,000 1,605 131,867

14,772 $ 0 11,999 10,000 5,122 2,780 0 44,673 85,000 1,781 131,454

11,910 $ 1,926 12,151 10,000 3,935 2,613 0 42,535 75,000 1,969 4,853 124,357

13,671 $ 1,945 14,058 10,714 3,828 2,484 0 46,700 64,286 1,838 11,363 124,187

11,287 463 11,678 10,714 7,485 2,040 0 43,667 53,571 1,895 13,611 112,744

16 34,400 0 48,699 63 0 83,178

17 40,607 0 64,068 512 0 105,204

17 49,616 0 76,152 1,659 -15,026 112,418

17 52,990 -136 89,983 2,238 -15,026 130,066

17 62,322 0 103,335 5,083 -15,026 155,731

Total liabilities and shareholders equity

215,045 $

236,658 $

236,775 $

254,253 $

268,475

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BDRR & Associates, LLC.

Balance Sheet 2007-2011 from S.E.C. Edgar Database

Fiscal Year Ended August 31 Assets Current assets: Cash and cash equivalents Short-term investments Trade accounts receivable Product held at contract packagers Inventories Current deferred tax assets, net Assets held for sale Other current assets Total current assets Property and equipment, net Goodwill Other intangible assets, net Investment in related party Other assets Total assets $ 2007 2008 2009 2010 2011

61,078 $ 0 47,204 1,447 13,208 4,145 0 3,489 130,571 8,811 96,409 42,543 1,015 3,837 283,186 $

41,983 $ 0 49,271 2,453 18,280 4,045 0 3,453 119,485 11,309 95,909 39,992 435 3,543 270,673 $

45,956 $ 0 48,061 1,797 15,858 4,369 0 4,736 120,777 10,930 95,424 32,205 0 3,281 262,617 $

75,928 $ 0 47,846 0 14,573 4,747 0 7,314 150,408 9,322 95,235 31,272 0 2,871 289,108 $

56,393 533 58,324 0 17,604 4,849 879 4,574 143,156 8,482 95,452 29,933 0 2,754 279,777

Liabilities and Shareholders Equity Current liabilities: Accounts payable Accounts payable to related party Accrued liabilities Current portion of long-term debt Accrued payroll and related expenses Income taxes payable Revolving line of credit Total current liabilities Long-term debt Deferred and other long-term liabilities Long-term deferred tax liabilities, net Total liabilities Shareholders equity: Common stock Additional paid-in capital Unearned stock-based compensation Retained earnings Accumulated other comprehensive loss Common stock held in treasury, at cost Total shareholders equity

21,854 $ 1,506 12,780 10,714 6,906 97 0 53,857 42,857 2,195 16,005 114,914

22,985 $ 547 13,143 10,714 6,084 1,090 0 54,563 32,143 3,099 16,876 106,681

12,529 $ 0 15,233 10,714 7,168 2,570 0 48,214 21,429 3,159 16,868 89,670

18,943 $ 0 14,382 10,714 14,265 1,516 0 59,820 10,715 4,635 17,414 92,584

19,373 0 15,258 10,715 7,471 1,413 0 54,230 0 2,508 21,813 78,551

18 74,836 0 118,260 7,504 -32,346 168,272

18 82,647 0 128,627 2,766 -50,066 163,992

18 86,729 0 138,367 -2,101 -50,066 172,947

18 93,101 0 157,805 -4,334 -50,066 196,524

19 117,022 0 176,008 -358 -91,465 201,226

Total liabilities and shareholders equity

283,186 $

270,673 $

262,617 $

289,108 $

279,777

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BDRR & Associates, LLC.

Income Statement 2002-2006 from S.E.C. Edgar Database

Fiscal Year Ended August 31 Net sales Cost of products sold Gross profit Operating expenses: Selling, general and administrative Advertising and sales promotion Amortization of definite-lived intangible assets Impairment of indefinite-lived intangible assets Total operating expenses Income from operations Interest income Interest expense Loss on early extinguishment of debt Other income (expense), net Income before income taxes Tax rate Provision for income taxes Net income Earnings per common share: Basic Diluted Shares used in per share calculations: Basic Diluted $ $ 2002 216,764 $ 108,153 108,611 2003 238,140 $ 115,928 122,212 2004 242,467 $ 116,944 125,523 2005 263,227 $ 133,833 129,394 2006 286,916 148,516 138,400

50,718 15,242 0 285 66,245 42,366 0 -5,791 -1,032 268 35,811 31.1% 11,135 24,676 $

54,061 17,449 879 71 72,460 49,752 0 -6,740 0 383 43,395 34.0% 14,754 28,641 $

58,311 21,539 0 224 80,074 45,449 0 -6,387 0 -209 38,853 34.0% 13,210 25,643 $

63,529 17,893 0 552 81,974 47,420 0 -5,133 0 578 42,865 35.1% 15,067 27,798 $

71,767 20,079 532 0 92,378 46,022 0 -3,503 0 339 42,858 34.4% 14,746 28,112

$ $

1.54 $ 1.53 $

1.73 $ 1.71 $

1.52 $ 1.50 $

1.67 $ 1.65 $

1.67 1.66

15,978 16,154

16,581 16,758

16,905 17,118

16,629 16,807

16,784 16,912

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BDRR & Associates, LLC.

Income Statement 2007-2011 from S.E.C. Edgar Database

Fiscal Year Ended August 31 Net sales Cost of products sold Gross profit Operating expenses: Selling, general and administrative Advertising and sales promotion Amortization of definite-lived intangible assets Impairment of indefinite-lived intangible assets Total operating expenses Income from operations Interest income Interest expense Loss on early extinguishment of debt Other income (expense), net Income before income taxes Tax rate Provision for income taxes Net income Earnings per common share: Basic Diluted Shares used in per share calculations: Basic Diluted $ $ 2007 307,816 $ 158,954 148,862 2008 317,118 $ 168,848 148,270 2009 292,002 $ 147,469 144,533 2010 321,516 $ 156,210 165,306 2011 336,409 168,297 168,112

78,520 20,743 583 0 99,846 49,016 0 -2,018 0 177 47,175 33.2% 15,641 31,534 $

83,800 19,837 597 1,340 105,574 42,696 0 -1,679 0 982 41,999 34.2% 14,377 27,622 $

78,051 19,459 468 6,710 104,688 39,845 428 -2,492 0 543 38,324 31.4% 12,037 26,287 $

87,323 22,061 724 0 110,108 55,198 174 -1,726 0 -89 53,557 32.6% 17,462 36,095 $

87,311 25,132 1,537 0 113,980 54,132 228 -1,076 0 247 53,531 31.9% 17,098 36,433

$ $

1.85 $ 1.83 $

1.66 $ 1.64 $

1.59 $ 1.58 $

2.17 $ 2.15 $

2.16 2.14

17,077 17,271

16,637 16,815

16,503 16,656

16,606 16,725

16,803 16,982

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BDRR & Associates, LLC.

2011 FCF CF Sales ROE Earnings Div PoR

$ $ 60.53 $ 336.41 17.6% $ $ 50.47% 55.00% EPS Base 47.44% 63.29% 59.17% 54.64% 1.08 $ 1.02 $ 1.00 $ 1.00 $ 1.00 $ 2.14 $ 2.15 $ 1.58 $ 1.69 $ 1.83 $ 1.66 0.88 53.01% 19.6% 16.0% 16.6% 19.5% 19.7% $ $ $ 321.52 $ 292.00 $ 317.12 $ 307.82 $ 286.92 $ 60.26 $ 45.01 $ $ 263.23 22.9% 1.65 0.86 52.12% 7.61 $ 17.26 $ 12.45 $ 9.96 $ 13.36 $ 1.66 $ 8.28 $

2010

2009

2008

2007

2006

2005

2004
7.70 $ 242.47 23.6% $ $ 1.50 0.80 53.33% $

2003

2002

2001

5-Yr Growth

9.72 $ 12.06 $ 238.14 30.4% $ $ 1.71 0.80 46.78% LT g

2.08

35.66%

48.10 $ 55.52 $ 51.75 $ 51.56 $ 48.83 $ 52.25 $ 44.74 $ 37.50 35.7% $ $

3.18%

$ 216.76

$ 174.58

3.23%

29.5%

1.53

1.02

5.21%

0.94

0.94

4.18%

61.44%

92.16%

Dividend Discount Model (DDM)

5-Year Average PoR

Rf Beta E(RM) - Rf E(RM)

2.07%

0.53
7.93% 10.00% Mkt Px EPS Growth $ $

k g E

6.272900% 3.0%
2.14

ST g 43.42 as of 11/7/11 close

$ 42.26 5.21% 5.58% 8.03%

2.5% 3.0% 3.5% $ 36.76 $ 40.96 $ 46.68 $ 37.90 $ 42.26 $ 48.18 $ 46.42 $ 51.90 $ 59.35

Average

$ 42.12

1 2 3 4 5 6 7 8 9 10 11

$
$ $ $ $ $ $ $ $ $ $

5.58% Div 1.14

1.20 1.27 1.34 1.42 1.50 1.58 1.67 1.76 1.86 Px

Historical Growth

Value
$ $ $ $ $ $ $ $ $ $ 1.07 1.07 1.06 1.05 1.05 1.04 1.03 1.02 1.02 1.01 $ 31.84

Sustainable Growth Forecasted Growth

5.21% 8.03% 5.58%

Assumptions: that interest rates will be constant hat dividends will grow indefinitely that WDFC has a constant growth pattern that dividend payments will be consistent

$ 42.26

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BDRR & Associates, LLC.

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations 0.7102 0.5044 -0.2390 2.1290 6 ANOVA df Regression Residual Total Coefficients Standard Error 76.000 97.700 -5.255 10.068 5.876 21.058 -0.227 0.261
Coefficients 76.00 -5.26 5.88 -0.23 Factor 1.00 5.58 0.53 55.00 Exp. P/E Exp. Value P/E Ind PEG Ind $ $

P/E Regression

3 2 5

SS 9.2252 9.0650 18.2902

MS 3.0751 4.5325

F Significance F 0.6785 0.6418

t Stat 0.778 -0.522 0.279 -0.872

Component 76.00 -29.32 3.11 -12.50 37.29 80.18 38.83 33.64

Intercept Growth Beta PoR

Expected Value Intercept Growth Beta PoR

P-value 0.518 0.654 0.806 0.475

Lower 95% Upper 95% Lower 95.0% Upper 95.0% -344.370 496.370 -344.370 496.370 -48.574 38.063 -48.574 38.063 -84.729 96.480 -84.729 96.480 -1.349 0.894 -1.349 0.894

P/E Regression Assumptions The Expected P/E will be 37.29 Expected Value at 80.18

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BDRR & Associates, LLC.

Calculation of the Weighted Average Cost of Capital (WACC)

Linear Trend Function Beta 0.6864

CAPM Risk-free rate Market Risk Premium Beta Cost of Equity Cost of Debt Long-term Debt Short-term Debt Total Debt Interest Expense 3-Year Rolling Avg Weight Weighted Average Cost of Debt

1.999% 5.5% 0.6864 5.77% 2005 64,286 10,714 75,000 2006 53,571 10,714 64,285 2007 42,857 10,714 53,571 2,018 3.14% 4% 0.13% 5.00% 2008 32,143 10,714 42,857 1,679 3.13% 7% 0.22% 2009 21,429 10,714 32,143 2,492 5.81% 12% 0.70% 2010 10,715 10,714 21,429 1,726 5.37% 27% 1.45% 2011 0 10,715 10,715 1,076 5.02% 50% 2.51%

Weighted Average Cost of Capital Total Debt 21,429 Total Equity 277167.3 Total Value 298,596 Tax Rate 32.96% WACC 5.60%

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Actual Data
Ratios
Sales Growth Gross Margin SGA/Sales Operating Margin Capex/Sales

Discounted Cash Flow Model

2002 50.1% 23.4% 26.7% 0.0%

2003 9.9% 51.3% 22.7% 28.6% 2.7%

2004 1.8% 51.8% 24.0% 27.7% 2.9%

2005 8.6% 49.2% 24.1% 25.0% 3.2%

2006 9.0% 48.2% 25.0% 23.2% 3.1%

ACTUAL 2007 7.3% 48.4% 25.5% 22.9% 2.9%

2008 3.0% 46.8% 26.4% 20.3% 3.6%

2009 -7.9% 49.5% 26.7% 22.8% 3.7%

2010 10.1% 51.4% 27.2% 24.3% 2.9%

2011 4.6% 50.0% 26.0% 24.0% 2.5%

Finanacial Statements
Sales COGS Gross Profit SGA Operating Income Tax Rate CAPEX Working Capital Free Cash Flow PV Factor PV-FCF

$ $ $ $ $

216,764.00 108,153.00 108,611.00 50,718.00 42,366.00 31.09%

$ $ $ $ $

238,140.00 115,928.00 122,212.00 54,061.00 49,752.00 34.00%

$ $ $ $ $

242,467.00 116,944.00 125,523.00 58,311.00 45,449.00 34.00%

$ $ $ $ $

263,227.00 133,833.00 129,394.00 63,529.00 47,420.00 35.15%

$ $ $ $ $

286,916.00 148,516.00 138,400.00 71,767.00 46,022.00 34.41%

$ $ $ $ $

307,816.00 158,954.00 148,862.00 78,520.00 49,016.00 33.16%

$ $ $ $ $

317,118.00 168,848.00 148,270.00 83,800.00 42,696.00 34.23%

$ $ $ $ $

292,002.00 147,469.00 144,533.00 78,051.00 39,845.00 31.41%

$ $ $ $ $

321,516.00 156,210.00 165,306.00 87,323.00 55,198.00 32.60%

$ $ $ $ $

336,409.00 168,297.00 168,112.00 87,311.00 54,132.00 31.94% 8,482.00 (1,661.00) 8,674.04

$ $

$ 6,523.00 $ $ 27,888.00 $

7,081.00 $ 8,355.00 $ 8,940.00 $ (8,894.00) $ 13,512.00 $ 17,381.00 $

8,811.00 $ 4,841.00 $ 11,413.61 $

11,309.00 $ (11,792.00) $ 138.40 $

10,930.00 $ 7,641.00 $ 35,833.28 $

9,322.00 $ 18,025.00 $ 38,262.96 $

$ 54,201.66 $ (13,866.64) $ 44,802.92 $ 25,116.37 $

Forecasted Data
Ratios
Sales Growth Gross Margin SGA/Sales Operating Margin Capex/Sales

2012 5.0% 48.0% 25.5% 20.0% 3.0%

2013 7.0% 48.0% 25.5% 20.0% 3.0%

FORCAST 2014 6.0% 48.0% 25.5% 20.0% 3.0%

2015 5.0% 48.0% 25.5% 20.0% 3.0%

2016 4.5% 48.0% 25.5% 20.0% 3.0%

TERMINAL 6 Year Historical Averages Forecasted Averages 4.5% Sales Growth 4.4% 5.5% 48.0% Gross Margin 49.0% 48.0% 25.5% SGA/Sales 26.1% 25.5% 20.0% Operating Margin 22.9% 20.0% 3.0% CAPEX/Sales 3.1% 3.0%
Tax Rate 33.0% 33.0%

Finanacial Statements
Sales COGS Gross Profit SGA Operating Income Tax Rate CAPEX Working Capital Free Cash Flow PV Factor PV-FCF

$ $ $ $ $

353,229.45 169,550.14 90,073.51 70,645.89 33.0%

$ $ $ $ $

377,955.51 181,418.65 96,378.66 75,591.10 33.0%

$ $ $ $ $

400,632.84 192,303.76 102,161.37 80,126.57 33.0%

$ $ $ $ $

420,664.48 201,918.95 107,269.44 84,132.90 33.0%

$ $ $ $ $

439,594.39 211,005.31 112,096.57 87,918.88 33.0%

$ $ $ $

459,376.13 220,500.54 117,140.91 91,875.23 33.0% 13,781 (2,268.14) 47,716.17 1.30 36,667.44

$ $ $ $

10,597 $ (1,744.05) $

11,339 $ (1,866.13) $

12,019 $ (1,978.10) $

12,620 $ (2,077.01) $

13,188 $ (2,170.47) $

36,682.59 $ 39,217.15 $ 41,587.62 $ 43,685.66 $ 45,661.41 $ 1.05 1.11 1.17 1.23 1.30 35,054.08 $ 35,488.59 $ 35,637.80 $ 35,450.29 $ 35,088.46 $

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BDRR & Associates, LLC.

DCF: Intrinsic Valuation Computation

Terminal FCF Rate Dsicount Rate Terminal FCF Value Present Value

3.0% 5.60% $ 1,834,900.10 $ 1,410,026.90

Valuation
Sum of Discounted FCF's P.V. of perpetuity Value of firm Less: Market value debt Plus: Value of Cash Private Market Value Shares outstanding $ 176,719.21 $ 1,410,026.90 $ 1,586,746.11

$ $

21,429.00 56,393.00

$ 1,621,710.11

16,803 $ $ 96.51 42.34

127.95%

Intrinsic Value
Current Price Return Prospects

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BDRR & Associates, LLC.

Industry Comparison
Company Name P/E Ratio Growth Beta PoR PEG Ratio EPS

PROCTER & GAMBLE CO. (THE) COLGATE-PALMOLIVE CO. KIMBERLY-CLARK CORP. CLOROX CO. (THE) CHURCH & DWIGHT CO., INC. ENERGIZER HOLDINGS, INC.
Comparables Average Comparables Median

15.92 17.56 16.65 18.56 21.37 18.60

18.11 18.06

9.3 9.7 8.9 8.8 9.6 12.5

9.80 9.45

0.47 0.46 0.38 0.41 0.38 1.38

0.58 0.44

50.94 43.90 64.94 66.82 32.05 0

43.11 47.42

1.71 1.81 1.87 2.11 2.23 1.49

1.87 1.84

3.94 4.98 4.19 3.47 2.01 3.72

3.72 3.83

WD-40
Company Name DY %

19.69

5.58

0.53 55.00
EV

3.53
EBITDA

2.14
EV / EBITDA

Closing Px Ticker

PROCTER & GAMBLE CO. (THE) COLGATE-PALMOLIVE CO. KIMBERLY-CLARK CORP. CLOROX CO. (THE) CHURCH & DWIGHT CO., INC. ENERGIZER HOLDINGS, INC.
Comparables Average Comparables Median

3.2 2.5 3.9 3.6 1.5

$ $ $ $ $ $

62.72 87.45 69.77 64.41 42.95 69.19

66.08 66.80

PG CL KMB CLX CHD ENR

-

$ 208,300,000,000 $ 18,540,000,000 $ 47,460,000,000 $ 4,290,000,000 $ 33,900,000,000 $ 3,870,000,000 $ 10,990,000,000 $ 1,070,000,000 $ 6,220,000,000 $ 537,410,000 $ 6,810,000,000 $ 698,470,000
$ 52,280,000,000 $ 4,834,313,333 $ $ 22,445,000,000 $ 2,470,000,000

11.24 11.06 8.76 10.27 11.57 9.75

10.44 10.67

2.94 $ 3.20

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BDRR & Associates, LLC.

SECTION IV: REFERENCES

1. 2. 3. 4. Kaplan, J.H. (2011, September 30). WD-40 Company. Retrieved September 23, 2011, from ValueLine Investment Survey Online database. Kwon, E. (2011, September 28). WD-40 Co. Standard & Poor's Stock Reports.

Retrieved September 28, 2011, from Standard & Poors NetAdvantage database. Standards for Consumer Products. 17 C.S.R. 94509 (2007). Retrieved from http://www.arb.ca.gov/enf/title17_94509.pdf The United States Patent and Trademark Office. (2011, September). USPTO Patent Full-Text and Image Database. Retrieved September 28, 2011, from http://patft.uspto.gov/netacgi/nphParser?Sect1=PTO2&Sect2=HITOFF&u=%2Fnetahtml%2FPTO %2Fsearch-adv.htm&r=0&p=1&f=S&l=50&Query=an%2FWd-40&d=PTXT

5. 6.

WD-40 Company. (n.d.). Retrieved September 10, 2011, from Mergent Online database.
WD-40 Company. (2010). Annual Report. Retrieved September 23, 2011, from http://www.envisionreports.com/WDFC/2010/11805OC10E/c28995e0fdab4d5a94fbc6b89a2b6045 /WD-40_ARandNotice_10-25-10_Preflighted_SECURED.pdf

7.

WD-40 Company. (2011). WD-40 Company Announces New Three-year Credit Agreement With Bank of America [Press release]. Retrieved September 23, 2011, from http://investor.wd40company.com/phoenix.zhtml?c=104082&p=irolnewsArticle&ID=1575224&highlight=

8. 9.

WD 40 Stock Report. (2011, December 10). Retrieved October 10, 2011, from S&P database.

Yahoo! Finance. (2011[A], November 23). WD-40 Company. (WDFC). Retrieved November 23, 2011, from http://finance.yahoo.com/q/ae?s=WDFC+Analyst+Estimates

10. Yahoo! Finance. (2011[B], December 12). WD-40 Company. (WDFC). Retrieved December 12, 2011, from http://finance.yahoo.com/q/co?s=WDFC

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