3 Things You Need to Know if You Buy Whirlpool Today

You may have a Whirlpool (WHR -0.39%) at home, but should you also have it in your stock portfolio? After all, the home appliance giant's 5.8% dividend yield and estimated price-to-earnings ratio of 7.5 times 2023 earnings are attracting a lot of investor attention.

That said, there's usually a reason why stocks trade on such high dividend yields and low valuations. As such, it makes sense to take a balanced approach and look at all angles before investing. Along that line of thought, here are three things you need to know before buying the stock.

Whirlpool faces near-term risk

It's no secret that a rising interest rate environment pressures consumer discretionary spending and the housing market. That feeds through into challenging market conditions for Whirlpool. Indeed, a quick comparison of its full-year guidance shows how expectations were lowered through the year.

Data source: Whirlpool presentations.

Furthermore, the lowering of earnings and cash-flow guidance occurred in the third quarter as trading conditions deteriorated. Moreover, CEO Marc Bitzer's outlook for the fourth quarter does not "anticipate this environment to fundamentally change, and we do expect our business to perform on a similar level" as in Q3.

The big change in expectations occurred due to "softer than anticipated" demand. It forced Whirlpool to make an earlier-than-expected return to the kind of promotional activity it was running before COVID-19 broke.

Given the deteriorating environment, it's likely that Whirlpool will enter 2024 under pressure, so don't be surprised if there's some near-term negative news flow.

Whirlpool is in cost-cutting mode

There's little the company can do about its end markets. Still, it can improve its operational performance and focus on cost cutting that will help offset margin erosion from increased promotional activity. Indeed, management is on track to strip out $800 million from costs in 2023 by reducing raw material costs, cutting logistics costs, and reducing complexity in its supply chain.

Moreover, CFO James Peters sees these cost-cutting actions carrying over into 2024: "There'll be a good amount of carryover in the range of 25% as we head into next year, and the momentum we have right now is in line with what we expected and a very positive trend from a cost perspective heading into next year."

Moreover, Bitzer believes the cost-reduction actions are a key part of getting North American earnings before interest and taxation (EBIT) margins from 10% at present to above 12% over time and is looking for "another sizable element of cost target" in 2024.

All told, look out for color on Whirlpool's cost-reduction plans in 2024 when the company gives earnings in late January.

Portfolio restructuring is critical in 2024

I focused on Whirlpool's North American segment above because that's where the company makes most of its profits.

Data source: Whirlpool presentations.

Readers will note how miserable Whirlpool's EBIT margin is in EMEA. Indeed, that's why management conducted a strategic review of the business and decided to take action in concert with Turkish company, Areclik, to remove its EMEA business from Whirlpool's direct control. The deal agreed to with Arcelik in January 202, to be completed in 2024, involves:

• The sale of Whirlpool's Middle East and Africa business to Arcelik.
• Whirlpool will contribute its European major domestic appliance business, and Arcelik will contribute its domestic appliance business (among others) to create a new company of which Whirlpool will own 25% and Arcelik the rest.

The European transaction has been approved by the European Commission and now needs final approval from the U.K.'s Competition and Markets Authority, which is expected to occur in April. Given the deal's importance in refocusing management's energy on its most profitable geography, it's a good idea to monitor any updates on the progress of the deal closely.

Image source: Getty Images.

A stock to buy?

On balance, I think that, despite the near-term risk, the answer is "yes." It won't be an easy ride for Whirlpool in 2024, but the prospect of lower interest rates later in the year will help sentiment.

Moreover, the $385 million dividend payout is easily covered by the estimated $500 million in free cash flow in 2023. Potential cost cuts will help offset ongoing margin pressure in 2024, and the Arcelik deal will restructure the company for long-term growth in its core North American market.