When Whirlpool (WHR -0.75%) announced guidance for the new year back in January, it spelled out a compelling argument for investors. Management said that even though household appliance sales have gotten a boost during the pandemic, greater use of those appliances while employees worked from home would create a strong replacement cycle over the next few years.
The company said that it expects full-year earnings per share (EPS) of $27 to $29. In addition, it guided to 5% to 6% organic revenue growth for the year. Whirlpool's stock is down 27% this year as of Thursday's close, likely due tin part o inflation fears. But the company's guidance assumes inflation will persist. To offset higher costs, Whirlpool will increase prices and introduce new products to the market.
Whirlpool's stock is trading around its lowest forward price-to-earnings (P/E) ratio in the past 10 years, other than the pandemic sell-off in 2020. If the company can hit its guidance for 2022, the stock could be a bargain.
Tackling inflation and beyond
Management estimates that inflation will erode its operating margin by 5 percentage points this year. At the same time, the company says it can add 6 percentage points by increasing prices and launching new products.
Can Whirlpool raise prices and still compete? Its portfolio holds recognizable names like KitchenAid, Maytag, and Amana, in addition to its namesake brand. When a refrigerator or dishwasher breaks down, it is a small household emergency. Some folks may take the time to search for a discount replacement, but the reassurance of a trusted brand counts for a lot when you're facing a long stretch without a fridge, or worse ... doing the dishes by hand! Even if that means paying a little extra.
On top of that, work-from-home trends have led to an increased usage of appliances. Whirlpool believes there is a strong replacement cycle over the next few years. On the company's fourth-quarter earnings call in January, CEO Marc Bitzer said, "We saw the oven usage and connected appliance increase compared to pre-COVID by more than 150%, and washers is about 50% up. That ultimately drives significantly higher replacement rates going forward."
Some 55% of Whirlpool's sales are replacement sales. Any extension or permanent work-from-home environment could be a boon to Whirlpool's replacement cycle.
The remaining portion of sales goes to newly constructed homes and discretionary customers. The National Association of Realtors expects an increase in housing starts in 2022 -- another potential catalyst for Whirlpool.
Whirlpool has also embraced digital trends. The company offers connected devices like voice control, food recognition, and automatic laundry detergent replenishment. Also, as more and more customers turn to e-commerce, Whirlpool is offering deliveries, installations, and haul-away services.
What could go wrong?
Inflation remains a problem for many companies, including Whirlpool. Though Whirlpool has been able to increase prices to combat its increased costs, price increases may be tougher to implement if inflation persists.
Interest rates are another issue for Whirlpool. Many times, customers finance purchases of large-ticket items like home appliances with credit. The Federal Reserve has signaled for several interest rate hikes this year, increasing financing costs and making big purchases a tougher pill to swallow for customers buying on credit.
A quick review of Whirlpool's financials shows sales were down every year from 2018 to 2020. But keep in mind, Whirlpool does business all over the world, and its results are often subject to currency fluctuations. Adjusted for that, sales actually grew 2.5% and 1.2% in 2018 and 2019, respectively. In 2020, sales were marred by COVID. Although sales have recovered over the past year and a half -- with sales growth of 13% in 2021 -- currency-related issues could linger.
Finally, you may be concerned that guidance is overly optimistic. Guidance was issued on Jan. 27, and management may not have had time to fully digest the impact of the Omicron variant. First-quarter 2022 results come out on April 26. Stay tuned.
What are you paying for?
Based on the midpoint of Whirlpool's 2022 EPS guidance, the stock's forward P/E ratio is around 6.1 at recent prices. That appears cheap for an established company with strong cash flows and legit growth prospects, and as I said above, it's a rare low for Whirlpool.
In the short term, the market may continue to be spooked by inflation and rising interest rates and negatively affect the stock. In the long run, these issues should subside. In the meantime, Whirlpool estimates that it will buy back $1 billion of stock in 2022. That is in addition to a dividend yield above 4%.
Long-term investors willing to take on some short-term risk may find value in Whirlpool stock.