Shares in Whirlpool (WHR -0.39%) declined 10.1% in January, according to data provided by S&P Global Market Intelligence. The down move in January follows a double-digit gain in December. The volatility in its share price reflects the market's sentiment toward interest rate-sensitive stocks.
Whirlpool's exposure to the interest rate cycle comes from its reliance on the U.S. housing market. North America is the company's highest-margin region and biggest revenue generator. As such, North America generated more than 5 times the segment profit of its next-largest profit-generating region, Latin America, in 2023. Europe, the Middle East, and Africa (EMEA) came in a distant third, with almost 20 times less profit.
As readers know, rising interest rates result in higher monthly mortgage payments, slow the housing market and, in turn, slow discretionary demand for household appliances.
Whirlpool continues struggle
Since the Federal Reserve hasn't reversed its rate hikes, Whirlpool continues struggling to generate growth. In fact, management's guidance for 2024 calls for flat like-for-like sales in 2023, with an ongoing earnings before interest and taxation (EBIT) margin of 6.8%, similar to 2023. This comes as the company was forced to pull forward promotional activity in response to weakening end markets.
CEO Marc Bitzer noted that Whirpool's overall margin performance was below its initial expectations in 2023, and "we were not able to reduce our inventories fast enough, which negatively impacted our full-year cash flow."
Bitzer said, "Obviously, these results were impacted by a still unfavorable housing cycle in 2023. The rapid and steep increase of U.S. mortgage rates led essentially to a freeze of existing home sales."
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Whirlpool in 2024
The company enters 2024 facing challenging near-term conditions, and the results and full-year 2024 guidance released at the end of January reminded investors of the stock's near-term risk. That said, the interest rate cycle will turn at some point, possibly this year, as inflation data appears to be moderating. That will help Whirlpool's sales.
The company also continues this year to take $300 million to $400 million out of its costs, following $800 million in 2023. In addition, it's on track to contribute its European business to forming a new company with an Arcelik subsidiary (Whirlpool will take a 25% stake in the new company) by the end of April.
The deal will help Whirlpool's management focus on its core North American market, and management expects to exit 2024 with its North American business generating 10% EBIT margins, compared to 8.4% in 2023. It points to a company that could recover strongly in 2024, provided the interest rate cycle turns sooner rather than later, and its valuation (less than 8 times forward estimated earnings with a dividend yield of 63%) is compelling.
