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You’ve Read the Last Issue of Intelligence Report: Dave Hammer on WD-40

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Turns out you can survive and thrive with WD-40 in your pantry drawer and your portfolio. “During my 14-year run in the institutional research and trading business in Boston, the finest analyst with whom I worked was oil analyst Dave Hammer. Since 1990 Dave has been the managing partner of Hammer Asset Management. We stay in touch to this day,” explains Dick Young. You can see why from his interview in the September 1987 issue of Richard C. Young’s Intelligence Report (excerpt found below).

(Edited for length and clarity)

This Month’s Special Guest David Hammer

He plays the piano, flute, trumpet, guitar and drums. He has a wood working shop where he designs furniture, he’s a ham radio operator, and he enjoys working on electronics projects. That’s what he does to relax, but when you talk with David Hammer, who is a certified financial analyst specializing in the oil and gas industry, it becomes clear that he thoroughly enjoys his work, too.

And why not? When the largest bank in the Rocky Mountain states asked him to head their investment subsidiary, it meant living in a part of the country he had already picked as his favorite vacation spot. Not only that, basing his research in Salt Lake City, he says, gives him a perspective on American business that you just don’t get in Manhattan.

Now the question that comes to mind is what does he know that they don’t know on Wall Street? And what ideas does he have for investors like you and me? For one thing, he says, you shouldn’t feel particularly obligated to follow the advice that’s popular on “the Street.”

IR: What stocks are you recommending?

Hammer: WD-40 Company (WDFC, OTC,$34/sh), manufacturers of WD-40. Are you familiar with it? They used to joke that it does everything including cure strep throat and arthritis. Actually, it’s a household product that prevents rust and acts as a lubricant, a penetrant and a moisture dispenser. It’s used for a variety of industrial applications, too.

Suppose your car won’t start because it’s raining and your ignition system’s all wet Just take off your distributor cap and spray this stuff inside. Even though it’s an oil, it’s a petroleum distillate product. It displaces the water, dries it up, and doesn’t inhibit electrical contact.

Anyway, that’s what it does. Here’s why I like it. We have a financial data base with over three thousand companies. Out of those three thousand, this is the only company that has a return on equity of over 40%, has no debt, has pre-tax margins in excess of 30%, and here’s the kicker – still provides a dividend yield of over 4%. It’s the only company that has a return on equity of 40%. That’s nearly three times average. No debt extremely high margins, and still provides a yield of 4%. They sell one product. Sales have doubled in the past six years as have earnings. Matter of fact their sales, cash flow, earnings and dividends have all doubled in the past six years.

So that shows you the sort of growth we’re talking about. The company has one small plant for manufacturing and warehousing – only 6,000 square feet. That’s less than a quarter of an acre. It’s a low cost operation, giving them a lot of free cash flow with which they are able to pay dividends. This stock, despite its unsurpassed profitability, sells at a price/earnings ratio about the same as the market overall – a little under $20/sh – really at a slight premium to the market in terms of P/E ratio. They have a tremendous amount of cash coming through because of these high margins. Their advertising and capital expenditure needs are minimal. The product is so good, it sells itself. Therefore, most of the cash is available to pay dividends. And we would expect dividends to grow at a far­above-average rate. I would say 15% to 20%. They’re growing like crazy and rewarding the shareholders.

Right now the product is sold primarily in the Western U.S. They’ve just begun to penetrate the East. And they’re trying to get women to be more familiar with WD-40 for the kitchen, you know, squeaks, for the sticky doors and windows, sticky anything.

IR:  But not through advertising?

Hammer: What they’ve done is go around to grocery store chains and say, “Here’s the greatest thing since sliced bread. You ought to put it on your counters.” You see, it originally sold through hardware stores and auto supply stores. In the West you’ll find WD-40 in every super­market, but you don’t yet see much of it in the East. They’re starting to develop markets in the U.K., Ireland, the Middle East and the Pacific.

IR:   An obvious question comes to mind:  Why isn’t this a stock that everyone knows about?

Hammer: Again, it’s been overlooked by Wall Street. It’s so small a company. With 7 1/2 million shares outstanding, why should Merrill Lynch bother?  It’s too small for the big firms on Wall Street to waste their time with. They couldn’t sell enough of it to make it worth their while.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com