With higher inflation being felt across the U.S. economy, the CEO of Whirlpool (WHR -10.13%) told Yahoo! Finance Live he expects his company will see its costs rise by $1 billion this year, primarily due to higher commodity prices. That statement followed an outstanding second-quarter earnings report delivered on July 22. While $1 billion would be a major jump in expenses, there are signs that Whirlpool could stay strong through the inflationary period -- provided a few factors line up in its favor.
The inflation situation
There's significant disagreement among economists attempting to predict where prices are headed. Some experts forecast that any inflation that occurs this year will be a short-term speed bump caused by a combination of the economic brake of lockdowns being released and an array of shortages, supply-chain issues, and demand surges. Others expect the trend will be more persistent, and thus more disruptive to individuals and businesses alike.
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The outlook is unclear enough that even within organizations, experts can't come to a consensus on what might be ahead. Bank of England economists, for instance, are divided into three camps on the subject of inflation and how best to respond to it, according to a Reuters article published last week. The central bank's policymakers recently offered opinions ranging from "I put more weight on my inflationary than my disinflationary scenario" to "for the foreseeable future, in my view, tight policy isn't the right policy."
U.S. economists are equally unable to reach a consensus, with some arguing that the infrastructure bill and other economic stimulus bills working their way through Congress will aid recovery and propel a jump of as much as 5.4% in GDP in 2022, and others arguing they will lead to rising prices and economic hardships.
Whirlpool's CEO Marc Bitzer told Yahoo!Finance that his company has "raised prices across the globe and we feel we are in a pretty good position to mitigate the effects of raw materials." However, he also said he does not expect further price hikes beyond the 5% to 12% ones the company has already implemented. Bitzer is sanguine that this period of inflation will be over by 2022, subscribing to the "temporary speed bump" scenario.
Whirlpool's current financial position
Based on the company's latest quarterly results, this year's price increases haven't dampened customer interest in Whirlpool's wares. Revenue surged by 31.7% year over year to $5.32 billion in Q2, and also surpassed Q2 2019's $5.19 billion by roughly 2.5%. Adjusted earnings per share (EPS) jumped by 220.8% year over year to $6.64, and rose 64.6% from Q2 2019's EPS of $4.01 as the company showed improvements in efficiency and profitability since the pre-pandemic days. Whirlpool also divested its subsidiary in Turkey, adding to its $769 million free cash flow and enhancing its performance, according to executive statements.
During the Q2 earnings conference call, Bitzer said the period's positive results were also "driven by robust and sustained consumer demand." He noted that reductions in structural costs contributed to its improved results, leading to expectations that strong growth will continue through the rest of the year "and beyond." He did, however, highlight a 400 basis point increase in expenses springing from increased resin and steel prices. CFO James Peters said that Whirlpool expects "to see demand strength driven from broader home nesting trends and an under-supplied housing market" not only through the rest of 2021 but into the long term as well.
The company raised its guidance for several metrics. It now anticipates a 40% rise in full-year EPS to around $26, and $1.7 billion of free cash flow, amounting to 7.5% of net sales. It expects its margins will continue to grow as its strategic efforts to boost efficiency lead to a reduction in waste. It also has $1 billion earmarked for new product development.
Can Whirlpool withstand inflation?
In the short term at least, Whirlpool looks as though it can sustain its current vigorous growth despite some macroeconomic headwinds. That extra $1 billion in material expenses has already effectively been canceled out by its price increases, and those did not prevent the enterprise from turning in excellent top- and bottom-line results last quarter. While its gains were naturally smaller compared to Q2 2019 than to the economic low point of Q2 2020, Whirlpool has returned to upward momentum relative to both years.
Market research firm Valuates Reports is forecasting that the home appliances market will expand at a compound annual growth rate of 6.4% through 2027, with international sales strengthened by a growing trend of replacement purchases in developing nations. Whirlpool is positioned to benefit from this trend, and has the market power and efficiency to sustain its growth beyond the immediate post-lockdown rebound.
The company is also spending significantly on its R&D program, working on innovations such as removable washing machine fixtures and extremely quiet refrigerators.
While recent inflation hasn't stopped Whirlpool's winning streak, more persistent inflation could eventually cut into its growth and profits significantly. Investors in consumer durables stocks have no economist consensus to turn to as a guide for how long inflation is likely to continue. However, Whirlpool's assessment that commodity price growth will ease back to normal levels by 2022 is certainly a plausible scenario, and for now, the future looks bright and bullish for the appliance maker.
