WD-40's Margin Resilience and Strategic Shifts Position It for Undervalued Growth Amid FX Pressures

The global economy faces a perfect storm of inflation, geopolitical tension, and currency volatility, yet WD-40 Company (NASDAQ: WDFC) is proving its mettle as a defensive play with hidden upside. While peers in consumer goods and industrials grapple with margin erosion and sales stagnation, WD-40's Q3 2025 earnings reveal a company thriving through operational discipline and strategic pivots. Its ability to expand gross margins to 56.2%—a 310 basis point jump from last year—despite $1.6 million in foreign currency headwinds, underscores a management team that's mastering the art of cost control in turbulent markets. Here's why investors should take notice.

Margin Resilience: A Triumph of Operational Precision

The headline numbers tell a compelling story. While revenue rose just 1.2% to $156.9 million, net income surged 6% to $21.0 million, and EPS jumped 5% to $1.54—well above analyst estimates. The key driver: gross margin expansion, which now exceeds the company's 55% long-term target a year ahead of schedule. Management credits this to:

1. Cost Management: Streamlining supply chains and optimizing production, particularly for its core maintenance products (96% of sales).
2. Geographic Focus: Prioritizing high-growth regions like the Americas (+4% sales) and Asia-Pacific (+7%), where WD-40's promotional strategies and distribution expansions are paying off.
3. Divestiture Clarity: Plans to offload its homecare and cleaning portfolios in the Americas and U.K. are reducing drag on margins. Once complete, these moves could free up capital for share buybacks or strategic initiatives.

This margin strength is critical in a market where currency swings are a constant threat. The EIMEA region's 5% sales decline—due to weakness in Turkey and the Middle East—would have been worse without hedging strategies like shifting the U.K. subsidiary's functional currency to the euro. Such foresight is rare in an industry where currency volatility often forces downgrades.

Narrowed Sales Guidance, Raised EPS: A Vote of Confidence

Despite narrowing full-year sales guidance to $600–620 million (from earlier estimates), management boosted EPS guidance to $5.30–5.60, a 12%–18% increase over 2024. This signals confidence that margin gains will offset macro headwinds. Compare this to peers like 3M (MMM) or Stanley Black & Decker (SWK), which have seen margins pressured by weaker industrial demand and inflation. WD-40's focus on premiumization (e.g., Smart Straw and EZ-REACH formats, up 17% in Q1) and regional expansion (Mexico, Brazil, and China) creates a moat against competitors.

Why Investors Should Bet on WDFC Now

1. Defensive Cash Flow: With a $32.2 million remaining buyback capacity and a dividend yield of 1.6% (raised to $0.94 per share quarterly), WDFC offers stability in volatile markets. Its dividend has grown annually for over a decade, outpacing inflation.
2. Undervalued Upside: At a forward P/E of ~22 versus its five-year average of ~25, the stock is priced for modest growth. Factor in potential asset sales from the homecare divestiture—potentially adding ~$0.33 to EPS annually—and the valuation looks even more compelling.
3. Structural Tailwinds: The shift to premium products (targeting a 10%+ CAGR) and geographic expansion (e.g., Mexico's sales quadrupling since 2020) create long-term growth anchors. Even EIMEA, despite current softness, has pockets of strength, like WD-40 Specialist's 15% rise in France and Iberia.

Risks to Consider

• Currency Volatility: A stronger dollar could continue to pressure international sales, though hedging and regional diversification mitigate this.
• Divestiture Execution: If the homecare sale stalls, the company risks retaining lower-margin assets that dilute EPS growth.
• Commodity Costs: Rising raw material prices could test margin resilience if passed through to consumers.

Investment Thesis: A Buy for Defensive Growth

WD-40's Q3 results demonstrate that it's not just surviving but thriving in a tough macro environment. The combination of margin resilience, disciplined capital allocation, and strategic divestitures positions WDFC as a rare “hidden gem” in a sector plagued by stagnation. Investors seeking a blend of dividend stability, cash flow predictability, and operational leverage should consider a position here. With shares down ~5% YTD despite strong fundamentals, this could be a buying opportunity ahead of its July 10 earnings call, where management may provide further clarity on FY2026 targets.

Recommendation: Buy WDFC at current levels, targeting a 12–18% upside to consensus estimates by year-end. Maintain a watch on EPS upgrades and progress on divestitures. For income-focused investors, the dividend's growth trajectory and payout ratio (~40% of earnings) offer a secure yield in turbulent markets.