Why Wall Street Is Happy Right Now
— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.
It’s earnings season and I have to talk about how companies are doing in this economy. In fact, I want to talk about one company, a business that has been around for a long time, making a product that most of us have used at one point during our lives.
The company I’m talking about is consumer products maker WD-40 Company (NASDAQ/WDFC). Founded in 1953 and based in San Diego, this firm sells lubricants, hand cleaners, and household cleaners all around the world. Its main product is “WD-40,” which is an all-purpose lubricant, rust preventative, and moisture remover. There’s probably not a garage or workshop around that doesn’t have a can of WD-40 sitting on a work bench.
So, this is a consumer products business that’s been through a lot of business cycles. In this recession, the stock held up extremely well; it even pays a dividend that currently yields just over three percent.
Recently, this stock hit a new 52-week high after reporting excellent profit growth. According to the company, its sales in its latest quarter only grew one percent to about 77.8 million dollars. The impressive growth was in earnings, as profits grew a substantial 64% to approximately $7.6 million, or $0.46 per share.
So, since sales aren’t growing that much at all, how is this company able to grow its profits? The answer is simple — by keeping a lid on costs.
This is how most businesses this third quarter will be able to report growing profits. Sales don’t grow in a recession, but profits certainly can. A company does this by delaying purchases of plants and equipment, laying off or under-employing workers, and spending less on things like IT infrastructure, research and development, etc.WD-40 Company is the perfect example of a business that is doing the right things (from a financial perspective) in a recession.
If you can’t grow a business during a recession, an enterprise has to keep a tight lid on costs. What happens of course is that this actually contributes to the recession, or rather slow economic growth coming out of recession. If sales aren’t roaring, a company isn’t going to be spending on new plants and equipment. It’s a vicious cycle that takes a long time to unwind.
And this is the trend I now see happening in the economy. The stock market is happy, because there’s profit growth. But the prospects for the Main Street economy are different. It’s going to be low and slow for quite a long time.