BUSI 534 Week 7 Integrative Learning Project Example

WD-40 Company: Valuation Report as of August 31, 2025

Summary of Conclusion

This report estimates the intrinsic value of one share of WD-40 Company common stock, on a marketable minority basis, as of August 31, 2025. Based on the income approach, weighted 70 percent, and the market approach, weighted 30 percent, the concluded value is approximately $114 per share. The stock closed at $216.04 on August 29, 2025, the last trading day before the valuation date. The difference does not mean the market is wrong; it means the market price assumes either long-run growth of about 6.7 percent a year forever or a cost of capital near 6.5 percent, assumptions this report considers optimistic for a company growing sales at 5 to 6 percent.

The Assignment

The purpose of this report is to estimate the intrinsic value of WD-40 Company's common stock to support an investment decision. Hitchner (2017) distinguishes intrinsic value, the value an analyst concludes from the fundamental characteristics of an investment, from fair market value, which is a price between hypothetical willing parties. For an actively traded stock, the trading price is strong evidence of fair market value, so an investment analysis is useful precisely because it asks whether that price is supported by the company's expected cash flows.

The premise of value is going concern: WD-40 is a profitable operating company with no expectation of liquidation. The level of value is marketable minority, the value of a small block of freely traded shares, which requires no discounts for lack of control or marketability. The valuation date is August 31, 2025, the end of the company's 2025 fiscal year, so that the analysis rests on audited annual statements. The principal sources were WD-40 Company's annual report on Form 10-K for fiscal 2025 (WD-40 Company, 2025), the most recent annual reports of three guideline companies, closing stock prices reported for August 29, 2025 (Yahoo Finance, 2025) and the U.S. Treasury's yield curve for that day (U.S. Department of the Treasury, 2025).

This analysis relies on the companies' audited financial statements without independent verification. The forecasts are the analyst's own and are not company guidance. The conclusion applies only to the stated purpose, standard and date.

Company Background

WD-40 Company, headquartered in San Diego and traded on the Nasdaq Global Select Market as WDFC, markets maintenance products and, in a shrinking part of its business, homecare and cleaning products. Its best-known product, WD-40 Multi-Use Product, is sold in more than 176 countries and territories through hardware stores, automotive parts outlets, industrial distributors, mass retailers, home centers, warehouse clubs and online retailers. The company outsources manufacturing to third-party contract manufacturers and buys its specialty chemicals and aerosol cans from suppliers, so it operates with very few physical assets of its own.

Management describes its plan as a four-by-four strategic framework. Four "Must-Win Battles" focus on growing the WD-40 Multi-Use Product through geographic expansion and premium packaging, building the WD-40 Specialist line and expanding digital commerce; four "Strategic Enablers" focus on operational excellence (WD-40 Company, 2025). Consistent with that focus, the company sold its homecare and cleaning brands in Europe, the Middle East, India and Africa (EIMEA) in the fourth quarter of fiscal 2025 and classified its Americas homecare brands, including 2000 Flushes, as held for sale, with a sale expected in fiscal 2026.

In fiscal 2025, maintenance products produced $591.0 million of the company's $620.0 million in net sales, and homecare and cleaning products $29.0 million. By segment, the Americas contributed $290.6 million, up 3 percent; EIMEA $236.4 million, up 7 percent; and Asia-Pacific $93.0 million, up 6 percent. Sales outside the United States were about two thirds of the total, which exposes reported results to currency movements.

Economic and Industry Setting

Demand for maintenance products follows household repair activity, vehicle use and industrial maintenance, all of which are steadier than spending on durable goods. That steadiness is the reason consumer staples and branded maintenance products usually carry lower business risk than the market as a whole. The main external risks in 2025 were input costs and currency. Specialty chemicals and aerosol cans are petroleum- and steel-based, and the company reported that lower costs for both raised its gross margin by 140 basis points in fiscal 2025, offset in part by higher warehousing and freight costs (WD-40 Company, 2025). Currency risk arises because most sales are outside the United States; the company reported foreign exchange gains in fiscal 2025 after losses in 2024.

Interest rates matter to the valuation itself. On August 29, 2025, the 20-year Treasury yield was 4.86 percent and the 10-year yield 4.23 percent (U.S. Department of the Treasury, 2025), well above the levels of the early 2020s. Higher risk-free rates raise every component of the discount rate, which is one reason this report's value is sensitive to the rate.

Financial Analysis

Sales grew at a compound rate of about 6.1 percent from fiscal 2021 to 2025. The gross margin tells the story of the period: it fell to 49.1 percent in fiscal 2022 as petroleum and can costs surged, then recovered to 55.1 percent by 2025 through price increases and easing costs. Operating margins were steadier, between 16 and 18 percent, because the company increased advertising and administrative spending as gross profit recovered; advertising and sales promotion alone rose to $37.4 million, 6.0 percent of sales, in fiscal 2025. Cash from operations collapsed to $2.6 million in fiscal 2022, when the company built inventory from $55.8 million to $104.1 million during supply disruptions, and recovered as inventory was reduced to $79.9 million.

The balance sheet is conservative. Borrowings of $87.0 million consist of $66.0 million of fixed-rate senior notes at 2.50 to 3.39 percent and $21.0 million drawn on a revolving credit facility, less than one year of operating cash flow. The current ratio was 2.8 at August 31, 2025. Capital expenditures have run below 1 percent of sales in the last three years, reflecting the outsourced manufacturing model, so most operating cash flow is available to shareholders; the company returned $62.6 million through dividends and repurchases in fiscal 2025. WD-40's economics are those of a brand, not a factory: high gross margins, little capital and most of its cash returned to owners.

Ratios confirm the point. On a normalized basis, fiscal 2025 operating income after a 24 percent tax was about $78.9 million. Invested capital, equity plus borrowings less cash, averaged about $287.8 million over the year, so the return on invested capital was about 27 percent; excluding acquired goodwill and intangibles, it exceeded 40 percent. Normalized net income of $79.1 million represented a return of about 32 percent on average stockholders' equity, achieved with borrowings of only 0.8 times EBITDA. Sales per employee were about $870,000 across a workforce of 714 people in 18 countries, a reflection of how much of the value chain the company leaves to contract manufacturers and distributors. Dividends of $50.3 million absorbed about 64 percent of normalized net income, and repurchases took a further $12.3 million. These returns are far above any plausible cost of capital, which means each dollar the company can reinvest in growth creates value; the constraint on growth is the size of the market for its products, not the availability of capital.

Company-Specific Risks

Hitchner (2017) recommends that a report identify the risks specific to the subject company, because they inform both the forecast and the discount rate. Four stand out for WD-40. The first is concentration in a single product: the WD-40 Multi-Use Product generates the large majority of sales, so damage to that brand's reputation, or a successful lower-priced competitor in a major market, would affect the whole company. The second is dependence on third parties. Because manufacturing is outsourced, the company relies on contract manufacturers and on suppliers of specialty chemicals and aerosol cans; the 2022 experience, when costs surged and inventory had to be built, shows how quickly supply problems reach the income statement. The third is customer concentration in retail: the company notes that changes in the strategies of its largest customers could hurt sales, and large retailers have bargaining power over shelf space and promotion. The fourth is currency, since about two thirds of sales are outside the United States while the stock and the dividend are in dollars.

Against those risks stand considerable strengths: a brand recognized in households and workshops worldwide, products used up and repurchased, low capital needs and conservative financing. The analyst judged that the strengths and risks roughly offset relative to a typical small public company, so no company-specific premium was added to the discount rate beyond the size premium. A reader who weighs the single-product risk more heavily would raise the rate, and the sensitivity table shows the effect.

Normalization Adjustments

Two adjustments were made to fiscal 2025 before forecasting. First, the provision for income taxes was only 10.5 percent of pretax income because the statute of limitations expired on an uncertain tax position related to the 2017 tax law's one-time tax on unremitted foreign earnings, producing a favorable adjustment of $11.9 million (WD-40 Company, 2025). Excluding it, net income would have been about $79.1 million and diluted earnings per share $5.82, the figure the company itself reported on an adjusted basis. The forecast uses a normalized tax rate of 24 percent, close to the 23.9 percent rate of fiscal 2024.

Second, the homecare and cleaning products are being sold. Their $29.0 million of sales carry lower margins than maintenance products; the company reported that its gross margin would have been 0.5 percentage points higher without them. The forecast does not model their removal separately, because their contribution to operating income is small and the expected sale proceeds would largely replace their value. Hitchner (2017) recommends that non-operating or discontinued items be valued separately when they are material; here they are not.

Other items required no adjustment. Executive compensation in a public company is set by an independent board and disclosed, so there is no owner compensation to normalize, and foreign exchange gains and losses were small and offsetting across the two most recent years.

Income Approach

The income approach was applied through a discounted cash flow method: a five-year forecast of free cash flow to the firm, discounted at WACC, with a terminal value at the end of the fifth year.

Cost of Capital

The cost of equity was built with the modified capital asset pricing model Hitchner (2017) describes. The 20-year Treasury yield was used as the risk-free rate because its horizon better matches an equity investment than shorter maturities. The equity risk premium of 5.0 percent is a forward-looking estimate, below the historical average return of stocks over bonds; Fama and French (2002) estimated from dividend and earnings growth that the premium for 1951 to 2000 was between about 2.6 and 4.3 percent, far below the 7.4 percent produced by average returns, and concluded that realized returns had been higher than investors expected.

Beta required judgment. A regression of WD-40's 60 monthly returns through August 2025 against the S&P 500 produced a beta of about 0.13, a figure the analyst judged unreliable, because the stock's monthly moves were dominated by company-specific news such as earnings surprises rather than by the market. A beta of 0.75 was selected instead, reflecting the steady demand for maintenance products while recognizing that a company dependent on discretionary repair and industrial activity is not immune to the economy. A size premium of 0.9 percent was added for a company with a market capitalization of about $2.9 billion, small among public companies. The pretax cost of debt of 3.5 percent blends the fixed-rate notes and the revolver; because debt is under 3 percent of capital, the result is insensitive to it.

Forecast and Present Value

Sales growth starts at 6 percent, close to the five-year historical rate and supported by the strategy's focus on geographic expansion and premium products, and slows to 4.5 percent by fiscal 2030 as the business matures. The operating margin rises gradually from 16.7 to 17.5 percent, reflecting the higher-margin mix once the homecare brands are sold. Depreciation is set at 1.4 percent of sales and capital expenditures at 1.2 percent, slightly above the recent level to allow for investment in digital commerce and packaging. Working capital grows at 20 percent of each year's sales increase, consistent with receivables and inventories that together equal about a third of sales, partly offset by payables and accruals.

Discounted, the forecast years' cash flows total $345.7 million. The model discounts each year's cash flow from the end of the year, a conservative choice; Hitchner (2017) describes the mid-year convention, which assumes cash arrives evenly through the year and would raise the value by roughly 4 to 5 percent at this discount rate. The end-of-year convention was kept because the company's sales are spread fairly evenly and the difference is small relative to the uncertainty in the discount rate itself. For the terminal value, fiscal 2031 free cash flow of $107.0 million, reflecting 3.5 percent growth and the lower reinvestment that slower growth requires, was capitalized at 9.3 percent less 3.5 percent, giving $1,845.3 million at the end of fiscal 2030, or $1,183.0 million in present value. The enterprise value is therefore $1,528.7 million. Subtracting borrowings of $87.0 million and adding cash of $58.1 million gives equity of $1,499.8 million, or $110.87 per share on 13,527,835 shares outstanding. The terminal value is 77 percent of enterprise value, which is typical for a stable business and the reason the sensitivity analysis below matters.

Market Approach

The guideline public company method compares WD-40 with publicly traded companies in similar lines of business. No public company sells a portfolio like WD-40's, so the analyst selected three specialty chemical and lubricant companies whose products serve similar maintenance and industrial markets and whose most recent annual results contained no major disruptions: NewMarket Corporation, a maker of petroleum additives; Quaker Houghton, a supplier of industrial process fluids and lubricants; and Innospec, a specialty chemicals company. Household products companies were considered but excluded: their scale is many times WD-40's, and one of them, Clorox, reported results disrupted by a 2023 cyberattack in the years preceding the valuation date. Alford (1992) found that selecting comparable firms by industry produced reasonably accurate valuations, but the analysis below shows how imperfect industry comparability is here.

Market capitalizations use closing prices on August 29, 2025, and diluted weighted-average shares from each company's most recent fiscal year; revenue and EBITDA, operating income plus depreciation and amortization, come from each company's fiscal 2024 annual report (Innospec Inc., 2025; NewMarket Corporation, 2025; Quaker Chemical Corporation, 2025). The guideline companies trade at 8.6 to 12.4 times EBITDA, while WD-40 trades at 26.4 times. WD-40 earns higher returns on far fewer assets than any of them and has a consumer brand that they lack, so its multiple should exceed theirs. The analyst selected 15.0 times EBITDA, above the top of the guideline range, to reflect WD-40's higher margins, lower capital needs and stronger brand. Applied to fiscal 2025 EBITDA of $112.0 million, the multiple gives an enterprise value of $1,679.8 million and an equity value of $1,650.9 million, or $122.04 per share. The selection of 15.0 rather than a higher figure is the most judgmental number in this report; a multiple of 20 would give about $164 per share.

A revenue multiple was examined as a cross-check but not used. The guideline companies trade at 1.04 to 3.16 times revenue, and a revenue multiple ignores differences in profitability, which are exactly where WD-40 differs most. NewMarket, the guideline company whose EBITDA margin is closest to WD-40's, trades at 3.16 times revenue; applying that multiple to WD-40's $620.0 million of sales would give an enterprise value of about $1,959 million, or roughly $143 per share, a figure that sits between the EBITDA-based result and the market price and does not change the conclusion that the guideline evidence supports a value well below the trading price.

Asset Approach

The asset approach was considered and not relied upon. Stockholders' equity at August 31, 2025, was $268.2 million, or about $19.82 per share, and $99.6 million of that consisted of goodwill and intangible assets from past acquisitions. The company's most valuable asset, the WD-40 brand built over seven decades, is absent from the balance sheet, because internally developed brands are not recorded. Hitchner (2017) notes that the asset approach is most appropriate for holding companies and asset-intensive or liquidating businesses; for an asset-light consumer brand valued as a going concern, it sets only a distant floor.

Reconciliation and Conclusion of Value

The income approach receives the greater weight because it captures the company's own growth, margins and capital needs, which the guideline companies do not share. Kaplan and Ruback (1995) found that carefully prepared cash flow forecasts valued actual transactions within about 10 percent on average, at least as well as comparable-company methods. The market approach receives 30 percent as a check that rests on observed prices, tempered by the weak comparability of the guideline group. The concluded intrinsic value is approximately $114 per share, marketable minority basis, as of August 31, 2025.

The sensitivity table shows the discounted cash flow value across plausible discount and growth rates. Even the most favorable combination shown, an 8 percent cost of capital and 4 percent perpetual growth, gives about $159 per share, well below the market price.

Comparison With the Market Price

The concluded value is about 47 percent below the closing price of $216.04. Rather than treat either number as wrong, the analyst solved the discounted cash flow model for the assumptions the market price implies. Holding the forecast and the 9.3 percent cost of capital constant, the price implies perpetual growth after fiscal 2030 of about 6.7 percent a year. Holding 3.5 percent terminal growth constant, it implies a cost of capital near 6.5 percent.

Neither is impossible. Investors may view WD-40 as a rare, durable brand with pricing power and expect it to keep expanding into new countries for decades, or they may accept a lower return for a stock with steady dividends, currently $3.76 a year after a 7 percent increase in December 2024, and little debt. But perpetual growth of 6.7 percent would exceed the long-run growth of the world economy, and a 6.5 percent cost of equity would be less than 2 percentage points above the 20-year Treasury yield. Penman's warning in our earlier course, to beware of paying for growth that cannot be supported, applies here, and Hitchner (2017) stresses that a conclusion should be tested against the evidence rather than adjusted to match a price.

Conclusion

WD-40 Company is an exceptional business: it earns gross margins above 55 percent, needs almost no capital, carries little debt and returns most of its cash to shareholders. On the assumptions in this report, its shares have an intrinsic value of about $114 on a marketable minority basis as of August 31, 2025. The market price of $216.04 assumes considerably faster long-run growth or a considerably lower required return than this analysis supports. An investor who shares the report's assumptions would conclude that the stock was priced for more than the business is likely to deliver; an investor who disagrees can use the sensitivity table and the implied-assumption analysis to see exactly which belief would justify the price. The value should be revisited when the Americas homecare sale closes and the fiscal 2026 results show whether margins continue to rise as the company becomes a pure maintenance products business.

References

Alford, A. W. (1992). The effect of the set of comparable firms on the accuracy of the price-earnings valuation method. Journal of Accounting Research, 30(1), 94-108. https://doi.org/10.2307/2491093

Fama, E. F., & French, K. R. (2002). The equity premium. The Journal of Finance, 57(2), 637-659. https://doi.org/10.1111/1540-6261.00437

Hitchner, J. R. (Ed.). (2017). Financial valuation: Applications and models (4th ed.). Wiley.

Innospec Inc. (2025). Annual report on Form 10-K for the fiscal year ended December 31, 2024. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/1054905/000095017025022803/iosp-20241231.htm

Kaplan, S. N., & Ruback, R. S. (1995). The valuation of cash flow forecasts: An empirical analysis. The Journal of Finance, 50(4), 1059-1093. https://doi.org/10.1111/j.1540-6261.1995.tb04050.x

NewMarket Corporation. (2025). Annual report on Form 10-K for the fiscal year ended December 31, 2024. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/1282637/000128263725000004/neu-20241231.htm

Quaker Chemical Corporation. (2025). Annual report on Form 10-K for the fiscal year ended December 31, 2024. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/81362/000008136225000014/kwr-20241231.htm

U.S. Department of the Treasury. (2025). Daily Treasury par yield curve rates. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2025

WD-40 Company. (2025). Annual report on Form 10-K for the fiscal year ended August 31, 2025. U.S. Securities and Exchange Commission. https://www.sec.gov/Archives/edgar/data/105132/000010513225000067/wdfc-20250831.htm

Yahoo Finance. (2025). Historical prices: WDFC, NEU, KWR and IOSP. https://finance.yahoo.com