Is Whirlpool Stock a Buy?

Whirlpool (WHR -0.39%) stock looks like a great value. After all, the midpoint of its earnings guidance puts it at less than eight times earnings, and the nearly-6.4% dividend yield is highly enticing for income-seeking investors. However, it's not without risk, and investors must consider all angles before buying in. Here's an assessment of the investment case for the stock.

Don't buy Whirlpool stock if you can't be patient

This company's fortunes are tied to the housing market, particularly the U.S. housing market. And, as everybody knows, a rising interest rate environment hit the housing market hard in 2023.

As such, the company enters 2024 with margin pressures and end-market headwinds. CEO Marc Bitzer noted on the recent earnings call Whirlpool's earnings before interest and taxation (EBIT) margin of 6.3% for 2023 was "more than one point short of where we wanted to be. And we were not able to reduce our inventories fast enough, which negatively impacted our full cash flow."

It gets worse. Due to the deteriorating end market conditions, the company was forced to start promotional activity earlier than initially planned. CFO James Peters said, "We expect 2024 promotional activity to be at similar levels as the second half of 2023, creating a margin headwind to the first half of the year."

In other words, it will get worse before it gets better. All these factors come together to explain management's mediocre guidance for 2024. The table below needs some explaining, as the sales and margin figures for 2023 are adjusted on a like-for-like basis by excluding the European business from the second to the fourth quarters of 2023. As a reminder, Whirlpool is on track to combine European business with an Arcelik subsidiary and create a new company, of which Whirlpool will own a 25% stake.

Data source: Whirlpool presentations.*adjusted for the exclusion of the European transaction intended to take place by the end of April 2024.

Why Whirlpool is an attractive stock

As mediocre as Whirlpool's guidance looks, its earnings must be put into the context of the current housing market. In addition, there's strong reason to believe that its profit margin will improve. Put another way, if 2024 marks a cyclical trough in its fortunes, this could prove to be a great time to get exposure to the stock.

I have five points for consideration in this regard.

Interest rate cycle and the relieving of margin pressure

First, it's no secret that rising interest rates hurt the housing market. Still, they won't last forever, and Whirlpool's management believes the U.S. housing market is under-supplied by some three million to four million units.

Second, the sluggish housing market doesn't just negatively impact Whirlpool's sales; it also negatively impacts its profit margins as it shifts more of its revenue from higher-margin discretionary demand to lower-margin replacement demand. In addition, it's forcing Whirlpool into margin-sapping promotional activity to generate unit sales growth and retain market share.

Cost cuts and underlying business improvement

Third, management isn't standing still, and following on from $800 million in cost cuts made in 2023, management plans to take another $300 million to $400 million out of costs in 2024. Cost-cutting actions include improving the efficiency of its supply chain and manufacturing facilities and cutting selling, general & administrative costs (SG&A) as it intends to become a smaller business.

Fourth, closely connected with the last point, the European transaction will remove Whirlpool directly from a region where it has struggled to generate meaningful margins in the past. For reference, Whirlpool's European, Middle East & Africa regions generated an EBIT margin of just 1.6% in 2023.

Whirlpool will exit 2024 in better shape

Fifth, provided management hits its targets for 2024, a snapshot of the company will look much better than it does now. The European business will no longer be part of the company. Meanwhile, management believes its core North American segment will exit 2024 with an EBIT margin of around 10%, compared to 8.4% in 2023, and Whirlpool will use cash from asset sales to cut its $5.67 billion net debt by at least $500 million.

A stock to buy?

It's an attractive stock to buy if you believe the housing market will bounce back and you're willing to tolerate the possibility of more margin pressure in the near term. But it's tough to predict when the Federal Reserve will start to cut rates, and no one should assume Whirlpool's management has any special insight into the matter. In other words, Whirlpool's guidance is subject to risk. Still, the value proposition is such that Whirlpool looks attractive on a risk/reward basis.