Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
No, sell Whirlpool shares! Trump's tariffs on steel will crush Whirlpool's profits.
Appropriately for a company with such a name, Whirlpool sits at the confluence of two apparently diametrically opposed tariff policies from the Trump administration. One is designed to raise the cost of buying foreign-made washing machines, which would give Whirlpool room to raise its own prices on these major home appliances without seeming much more expensive than the competition. The other tariff, however, would raise the cost of steel Whirlpool imports to build its washers with, increasing the company's input costs and hurting Whirlpool's profits, despite its higher selling prices.
How should investors weigh the potential of these two sets of tariffs to affect Whirlpool's business, and what will it mean for Whirlpool stock? Investment banker Credit Suisse just came up with one answer: Whirlpool stock will outperform the market over the next year.
Here's what you need to know.
Tariff No. 1: Washing machines
In January, the Trump Administration slapped 20% initial tariffs on washing machines imported from abroad, including on washers from Samsung and LG, both highly rated by Consumer Reports and strong competitors to Whirlpool. Tariffs are expected to later rise as high as 50%. Goldman Sachs has predicted the average cost of a washing machine in the U.S. will spike by 8% to 20% this year.
These tariffs are already making themselves felt in the form of price hikes across a range of home appliances, which have risen 5% on average in the U.S., as Credit Suisse explains in its upgrade today, covered on StreetInsider.com (requires subscription). Washers and dryers, says the analyst, are enjoying the greatest increases in price -- which is exactly what you'd expect to happen in the wake of the Trump tariffs.
Tariff No. 2: Steel and aluminum
Also contributing to price hikes in the home appliances industry, however, are the Trump administration's imposition of new tariffs on steel (25%) and aluminum (10%) imports. It wasn't clear at first whether these tariffs were actually going to go into effect, or whether they'd be as wide-ranging as initially promised. Last week, however, the Trump Administration confirmed it will be going ahead with imposing tariffs on imports from Canada, Mexico, and Europe.
Already, says Credit Suisse, steel prices have risen 30% so far this year in response to the steel tariffs threat. Even if there had been no tariff on washer imports, therefore, it's likely that companies such as Whirlpool would have had to raise prices on their products to recover the additional cost of manufacturing washers and other appliances -- directly tied to this set of tariffs.
How the tariffs interact
Having had several months now to examine the effect of the threat of these tariffs coming into effect, Credit Suisse now says its seeing...little net effect at all. To the contrary, says Credit Suisse, channel checks are showing industry "sell-through" of appliances continuing to grow at 2% to 4%, such that if prices are rising, it's not seeming to curb consumer demand.
What's more, as the analyst explains in its write-up today, rising prices on appliances "should help offset higher input costs for Whirlpool." The analyst sees this trend continuing to support "improved profitability in North America over the next several quarters" for Whirlpool. And in response to this belief, Credit Suisse is upgrading Whirlpool shares to outperform and assigning the stock a $195 price target that implies nearly 35% upside from today's prices.
Is that likely?
Valued at $10.6 billion in market capitalization today, Whirlpool stock currently sells for nearly 32 times trailing earnings and 45 times free cash flow -- which sounds like a lot. Analysts who follow the stock, however, see Whirlpool greatly increasing its profits this year, now that last year's depressed earnings due to tax reform are past.
How much more? The consensus of analysts surveyed by S&P Global Market Intelligence is that Whirlpool will earn more than $13 per share this year (nearly triple last year's $4.70 in GAAP profits). Free cash flow is expected to more than triple to $1 billion, then keep on growing pretty steadily thereafter.
Assuming Whirlpool earns as much as it's expected to this year, and also grows at the average 10% rate that analysts expect it to grow over the next five years, that may be fast enough growth to justify the stock's price. Based on current-year expected earnings, and valuing the stock on market cap alone, Whirlpool costs 11.3 times this year's profits.
On the other hand, though, Whirlpool stock also carries a heaping helping of debt -- $4 billion net of cash on hand. Factored into the valuation, this debt raises the company's debt-adjusted market capitalization (its enterprise value) to $14.6 billion, and puts its debt-adjusted P/E at 15.6.
Is 10% growth good enough to justify that valuation? Even factoring a 3% dividend yield into the picture, I kind of suspect it's not. More importantly, though, Credit Suisse is basing its upgrade today not just on a belief that Whirlpool stock is worth what it costs now, but that it will be worth 35% a year from now. I think that's a very difficult case to make, especially with the uncertainties of Trump tariff policies (and his likeliness to stick to them) thrown into the picture.
I wouldn't be buying Whirlpool stock today. It might be fairly priced, but it's certainly not as cheap as Credit Suisse says.