Falling Knives
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By deadcat2
November 7, 2007

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What if I told you that you could buy a well known $6B blue chip company - founded in 1906 - growing its earnings this year at around 25%, but currently sporting a p/e around 10? It has recently lost about a third of its market cap, dropping from a share price of $118 a few months ago to its current sub-$78 price tag. Interested? Oh yeah, and while you wait for the market to return to its senses, you can collect a dividend in excess of 2%.

The company? Whirlpool (WHR).

With acquisition of Maytag in April of 2006, Whirlpool has an impressive line up of brands including Whirlpool, Maytag, KitchenAid, Jenn-Air, Amana and several other brands. Flipping through a recent flyer for Lowes, I notice they also sell food processors, toaster ovens, coffee makers and a host of very affordable small kitchen appliances and tools besides the "durable goods" for which most consumers know them.

3Q07 reported on 10/23/07 and the numbers look very good. EPS of $2.20 compares with $1.68 yoy, up 31%. Management says they're on track to earn $8.00-8.50 this year, up from $6.35 last year. Analysts are on the low side of that range, with the average forecast at $8.01, still a 25.5% increase over eps for 2006. The news release for the 3Q can be found here.

The company bought back $150M of stock during the quarter, bringing the ytd total to $251M out of a $500M share repurchase program. The ytd figure represents approximately 4% of the current market cap, although it's not certain the price Whirlpool may have paid for its shares. Sweeter still, Jeff Fettig, Chairman and CEO, recently purchased 10,000 shares at $84.33.

Net sales in North America represent 60.9% of the total 3Q07, followed by Europe at 20.6%, Latin America at 16.8% and the rest from Asia. Contributions to operating profit from these locations are 51.2%, 32.5%, 40% and -2%, with -21.7% from "other and eliminations." While operating profits for North America are down 24%, they are up substantially in Europe (47%) and Latin America (85%). These figures reflect the growing importance of an international market for Whirlpool.

While net sales for the quarter are flat, operating profit has increased during the quarter and ytd by approximately 15%, primarily as a result of the reduction in SG&A. Additionally, an asset sale gain, a significant drop in taxes (not sure why - perhaps as a result of acquisition costs) and the elimination of losses from discontinued ops have contributed to the increase in net profit. All these items should be monitored to ensure that organic growth is the real driver over time.

While analyst estimates have migrated downward this year, WHR has managed positive surprises in 11 out of the past 12 quarters (with one quarter in-line) with an average upside surprise of about 11%. As mentioned before, analysts estimates for 2007 average $8.01, a growth in earnings over last year of 26%. For the next two years, estimates are in the neighborhood of 13%/year.

The big question, of course, is whether WHR can deliver on these estimates in the current housing environment. I think there's enough margin of safety in the current price to make WHR a good buy right now. The current p/e is a shade over 10 and the future p/e is 8.6. Yahoo says the 5-year earnings growth rate is 17%, which yields a crazy low PEG of 0.6, but if you take only the growth rate mentioned above (13%), the PEG is still a very appealing 0.8. Check out these back of the envelope calculations:

Assume a modest p/e of 12 against 2008 eps forecast of $9.08 = $109. Add to that 5 quarters of dividends at $0.43 = $2.15. Total of $111 represents an increase of nearly 43% from my purchase price of $77.70 earlier today (as I write this, the price has dropped closer to $77.00), and a CAGR of slightly more than 36%! And that's based on a price within the next 14 months that is less than what WHR has shown it's capable of attaining back in mid-June (admittedly, that was during the euphoria that preceded the "Great Meltdown").

If you choose to be a bit more bullish, assume a p/e in line with the projected growth of 13% and you get a target price of around $120, including the dividends. That's an increase of 54% and a CAGR of 45%. Not bad for a $6B blue chip.