Earnings Sparks Short-Covering In WD-40 Company WD-40 Company (NASDAQ: WDFC) produced a mixed FQ1/Calander Q1 but the results were strong enough to spark short-covering. With the short-interest sitting at over 12% coming into January there is...

Institutions Buy WD-40 Company, Support Price Action

WD-40 Company (NASDAQ: WDFC) produced a mixed FQ1/Calendar Q1 but the results were strong enough to spark short-covering. With the short-interest sitting at over 12% coming into January there is quite a bit of fuel for this fire, enough perhaps to get this market back up to the all-time highs set in early 2021. The key takeaways from the report, the details we think are moving the stock, are the revenue and growth outlook and the outlook for margins. The company experienced a sharp contraction in margin over the past year but there is evidence of improvement and an outlook for margin to return to record levels.

And the institutions have been buying this stock too. While activity was mixed for the year, institutional ownership increased by a net $149.86 billion in 2021 bringing the total ownership up to 87%. Activity has been light in the first week of the year but it looks like that trend will continue in 2022 as well. There is only one sell-side firm covering the stock right, however, but he is relatively bullish. DA Davidson maintains a Hold rating on the stock with a price target that implies a 15% of upside for the stock. Their price target of $277 would put the price action just below the highs set in July 2021.

WD-40 Company Exceeds Expectations

WD-40 Company exceeded all expectations in the FQ1 period and is demonstrating solid, long-term growth but sequential fluctuations in results that have been amplified by the pandemic have been impacting the results. This quarter, revenue and earnings beat the consensus but last quarter they missed. Regardless, the $134.75 million in revenue is up 17% sequentially, 8.2% versus last year, and 40% versus 2019 on growth efforts and pandemic tailwinds. The revenue beat the Marketbeat.com consensus by 430 basis points as well, and the strength carried through to the bottom line.

On a regional basis, sales in the APAC grew by 34% followed by weaker 5% growth in EMEA and 4% in the Americas. On a segment basis, the core maintenance products group grew by 10% while the legacy harvest brands in the household segment saw sales fall 15%. The bad news is that supply chain disruptions and labor costs cut into the gross margin by 560 basis points and led to a 7% increase in SG&A. The good news is the 50.8% in GM beat the consensus, if by a slim margin, and resulted in strong bottom-line results as well. The GAAP EPS of $1.34 is down YOY due to margin contraction but beat the Marketbeat.com consensus by a dime.

Looking forward, the company is projecting full-year revenue growth at 7% to 12% versus the 9% consensus estimate and EPS in the range of $5.24 to $5.38 versus the $5.31 consensus. In our view, the guidance may be weak and there is upside risk in the margin outlook. Not only is the company raising prices but there is some expectation for freight costs and other inflationary pressures to ease later in the year but we'll see about that.

The Technical Outlook: Short-Covering Begins In WD-40 Company Stock

The Q1 results sparked a pop in shares of WD-40 Company that opened a gap in the price action and left shares up 2.98% at the end of the session. The candle speaks of resistance at the $250 level but the upward drift in price action has been confirmed with a close above the short-term EMA and the indicators have begun to roll into bullish signals. It is our opinion that price action will move up to retest resistance at the $250 level. The question is if the short-sellers are going to use that level to reposition for another leg down or if the price action will move up to a new high. Assuming price action moves up to a new high, we see shares of WDFC retesting the all-time highs by mid-year.