Maytag Sags On Warning

By Brian Graney (TMF Panic)
September 10, 1999

Shareholders of appliance maker Maytag Corp. (NYSE: MYG) got a taste of the spin cycle today as the company's stock went down the drain for a more than 20% loss. This morning, the Newton, Iowa-based company announced that its second half profits will be hurt by lower unit volumes in its low-end and mid-range home appliance franchises, which principally include the Performa, Magic Chef, and Admiral brand names. Instead of the EPS of $0.99 in Q3 and $0.90 in Q4 forecasted by analysts surveyed by First Call, the company is now guiding investors to expect earnings to be flat with the $0.84 and $0.75 reported in the same periods last year.

The announcement was a real bummer for a company that has created significant value since the end of 1996 -- value that had been duly rewarded by the market with a 218% share price rise before today's drop. Many analysts -- this Fool included -- were expecting a strong U.S. economy and the successful launch of new and innovative high-end products to keep the earnings momentum going this year. Last year, Maytag's annual earnings rose 63% to $3.05 per share. Based on today's estimates, the company is looking at 1999 earnings of $3.51 per share, or 15% growth. That's still not shabby for an appliance maker, but it's nowhere near last year's excellent results.

What investors need to keep firmly at the front of their minds is that the profit shortfall is occurring in Maytag's low-end and mid-range appliances, or the roughly 30% of its appliance business not represented by the high-end Maytag and Jenn-Air lines. The high-end stuff continues to move smartly from the retail showroom floors and into consumers houses, thanks to the popularity of ingenious products like the Neptune front-loading washer, the Gemini twin range, and the Hoover WindTunnel upright vacuum.

The company's strategy for adding economic value has correctly stressed the high end, and that strategy is still intact despite the problems in the other product segments. However, the unit volume problems have ramifications throughout the company's operations, causing inventories to get out of whack and boosting operating costs and inefficiencies. Perhaps the best move for Maytag at this point would be to shed some of the assets associated with its lower-margin products and focus exclusively on the high-end.

Instead of that course, though, recently installed chairman and CEO Lloyd Ward is choosing another tack. "To create new breakout years in sales and earnings, we will get smarter, faster, and better at delivering innovation and operating excellence in every business and across every product line. That's the work we have in front of us," he stated.

Of course, the Street is leery of any more freezerburn after today's disappointment and Ward's lack of a track record as the firm's top dog. Maytag's new boss has gotten off on the wrong foot, but he is fortunate enough to have inherited the helm of a company that has demonstrated over the past two years that it has its value driving ducks in a row. Management execution from here on out will be key to restoring both the Street's faith in Maytag and keeping the value creation story going.

Related link:
Stocks For Mom, Maytag Corp., 04/27/99

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