Shares in household appliance company Whirlpool (WHR -0.39%) rose by 11.8% in December, according to data provided by S&P Global Market Intelligence. The move comes as the market took a brighter view of interest-rate-sensitive stocks in the light of reductions in market rates throughout the month.
Whirlpool's difficult 2023
There's no doubt companies like Whirlpool faced a challenging environment in 2023. Rising interest rates pressured consumer discretionary spending, which means more promotional activity to drive sales growth in Whirlpool's case. The pressures can be seen in its guidance through the year.
The changes in the margin guidance, and therefore earnings and cash flow, come down to returning promotional activities to pre-pandemic levels. Whirlpool CEO Marc Bitzer was quite clear on the matter during the third-quarter earnings call in October.
He noted that "discretionary purchases have been even softer than anticipated due to increased mortgage rates and low consumer confidence," forcing the company to bring forward promotional activity. Hence, it returned to pre-pandemic levels one or two quarters earlier than management had originally planned.
|
Whirlpool Full-Year 2023 Guidance for... |
January |
April |
July |
October |
|---|---|---|---|---|
|
Net sales |
$19.4 billion |
$19.4 billion |
$19.4 billion |
$19.4 billion |
|
Ongoing EBIT margin |
7.5% |
7.5% |
7.25% |
6.25%-6.5% |
|
Free cash flow |
$800 million |
$800 million |
$800 million |
$500 million |
|
Earnings per share |
$16-$18 |
$16-$18 |
$16-$18 |
$16 |
Data source: Whirlpool presentations. EBIT = earnings before interest and taxes.
A turnaround in place for 2024?
Whichever way you look, Whirlpool entered 2024 with deteriorating earnings momentum behind it, but will that change through the year?
Just as rising interest rates hurt end demand in 2023, a decline in rates (if it occurs) will likely boost demand in 2024.
Meanwhile, management is taking other actions to improve its profitability. The first of the two most notable actions is the cost-cutting measures intended to take out $800 million in costs in 2023. Management believes they will carry over in 2024, resulting in more annual cost reductions.
Image source: Getty Images.
The second is positioning its European, Middle Eastern, and African (EMEA) subsidiary with Arcelik's European business to create a new company, in which Whirlpool will own a 25% stake. The deal is scheduled to complete in 2024 and will move Whirlpool away from a market it has struggled to generate profit margin in. For example, Whirlpool generated just $1 million in earnings before interest and taxation in the third quarter on $863 million in sales in EMEA.
A stock to buy for 2024
Buying Whirlpool is an excellent way to play a lower-interest-rate environment for enterprising investors looking to buy cyclical recovery stocks.
