Last week, Whirlpool (WHR -0.82%) announced an acquisition that did not make huge headlines. Yet in purchasing garbage disposal leader InSinkErator for a mouth-watering valuation, Whirlpool strengthened its already compelling brand portfolio. Savvy investors may want to take note of the unheralded deal. Here's why.
Under the radar
Last week, home appliance leader Whirlpool plunked down $3 billion in cash for garbage disposal business InSinkErator. The company expects sales to reach $650 million and EBITDA, or earnings before taxes, interest, depreciation, and amortization, of above $170 million, meaning Whirlpool was able to secure the company for a valuation of about 14 times EBITDA.
Garbage disposal units should be quiet, work reliably, and never be noticed by the folks that use them. So if you've never heard of InSinkErator, Whirlpool is OK with that; you're not supposed to know it's there. On the other hand, plumbers around the U.S. are very much aware of the brand, which is known for its durability and quality. Due to its execution over the years, InSinkErator has commanded an almost unbelievable market share of over 70%. If you look under your sink right now, you'll probably see an InSinkErator.
When your garbage disposal goes bad, you make an emergency call to your local plumber or landlord to get it fixed because your sink may be inoperable or smell horrible. Plumbers don't like to get those sometimes-off-hours emergency calls, either. Therefore, they almost automatically bring an InSinkErator to replace the broken garbage disposal so they won't have to return anytime soon.
Those replacements are another component of the InSinkErator business that Whirlpool found attractive. About 75% of InSinkErator sales come from replacements. While some software stocks command a hefty valuation for sexy recurring SaaS-based revenue, Whirlpool was able to pick up InSinkErator with its less headline-grabbing yet recurring garbage disposal replacement business for a much more enticing valuation. In the end, profit is profit, whether the company is popular or under the radar. Based on end-of-year projections, InSinkErator generates an EBITDA margin of nearly 20% on sales of its products.
Is Whirlpool stock a buy after the acquisition?
Whirlpool expects the deal to add $1.25 in earnings per share in 2023, meaning the deal could add more than 5% to management's adjusted earnings per share projection of $22 to $24 in 2022. The company will use some debt to finance the deal. As a cash-generative company, Whirlpool plans to pay down debt associated with the deal quickly, which could cause earnings per share from the deal to reach $2 to $3.
After returning over $5 billion to shareholders in share buybacks and dividends over the last five years, including $900 million in buybacks this year, Whirlpool is pausing buybacks to conserve cash for the InSinkErator deal and maintain a strong balance sheet.
Whirlpool stock is down nearly 29% this year, primarily based on a potential slowdown in the housing market as mortgage rates escalate and price some potential homebuyers out of the market. Though a slowdown could slow sales growth from Whirlpool's refrigerators, dishwashers, washers, and dryers, those items also benefit from replacement.
Whirlpool has a long history of being a shareholder-friendly and cash-generative business, and the valuation of the InSinkErator acquisition demonstrates management's keen investment eye. Even if the housing market slows, investors may have a great chance to buy the dip in Whirlpool shares.