There's a reason why Whirlpool (WHR +2.80%) trades on less than 7 times the midpoint of management's full-year earnings per share guidance of $13 to $15 and with a dividend yield of 7.2%. Simply put, the market has little faith in management's guidance, and unfortunately, the latest first-quarter earnings report did little to dispel those fears. That said, there's a margin of safety baked into the valuation. Is it enough to justify buying the stock?
The investment case for buying Whirlpool
Testing an investment hypothesis with hard evidence of a trend in quarterly results makes sense. In that vein, here's a brief recap of the case for Whirlpool in 2024.
NYSE: WHR
Key Data Points
Investors understand that this will be a challenging year for Whirlpool. Management forecasts like-for-like sales to be flat at $16.9 billion, and ongoing earnings before interest and taxation (EBIT) to also be flat at 6.8%. That's understandable in a year when relatively high interest rates are pressuring the housing market and discretionary spending on household appliances.
However, management is aggressively cutting costs ($800 million in 2023, with a further $300 million to $400 million planned for 2024). At the same time, the deal to combine its European major domestic appliance (MDA) business with an Arcelik business (Whirlpool owns a 25% stake in the new company, Beko Europe) will rid the company of a low-margin and cash-guzzling business. Whirlpool's overall margin and cash flow generation should improve as a result of the deal.
As a result, management aims to refocus on its core and higher-margin North America MDA business while developing its growth markets in Latin America MDA and Asia MDA and investing in its global small domestic appliance (SDA) business.
Image source: Getty Images.
Ultimately, management expects growth to improve in the second half, and continues to expect the following this year:
- Ongoing EBIT margin of 6.8%
- MDA North America EBIT margin of 9%, and exiting 2024 with EBIT margin of 10% to 11%
- Cost actions of $300 million to $400 million
- Ongoing EPS of $13 to $15
- Free cash flow generation of $550 million to $650 million
It's a compelling investment proposition. And as noted earlier, if Whirlpool merely hits the figures, there's a good chance the stock will end 2024 significantly higher.
The problem
The current valuation suggests that the market doesn't believe the company will hit these numbers, and an analyst at RBC Capital recently lowered the price target on the stock from $85 to $79 while maintaining an "underperform" rating. The recent results didn't greatly help the bull's case for two reasons.
First, MDA North America was actually the company's weak point, with an 8% decline in sales EBIT margin to 5.6% from 10.1% in the same quarter of 2023. In addition, CFO Jim Peters noted: "It is clear the current level of promotional investments is not achieving our value-creation expectations" during the earnings call. Essentially, its promotional activity failed to stimulate discretionary MDA purchases. In response, Peters announced a "weighted average 5% promotional program price increase."
Second, management noted that a combination of "sticky inflation impact on supply chain costs" meant it was trending toward the low end of the $300 million to $400 million cost reduction aim. It gets worse, as management noted unfavorable raw material cost trends could pressure margins in 2024.
Image source: Getty Images.
What Whirlpool needs to do this year
Sticky inflation, rising raw material costs, and an unsuccessful promotional program in its core North American market all appear to pressure Whirlpool's outlook. In addition, there's no guarantee that the 5% price increase won't result in some market share loss or volume decline.
On a more positive note, the other three ongoing segments performed well, and management believes a "massive product launch" of SDAs (including espresso machines and innovative grain and rice cookers) in the second quarter will drive growth in high-profit-margin categories.
|
Whirlpool |
First Quarter EBIT |
Growth |
EBIT Margin |
|---|---|---|---|
|
MDA North America |
$135 million |
(49)% |
5.6% |
|
MDA Latin America |
$65 million |
81% |
7.8% |
|
MDA Asia |
$11 million |
38% |
4.6% |
|
SDA Global |
$33 million |
74% |
18.1% |
Data source: Whirlpool presentations.
A stock to buy?
The company has a lot of work to do to meet its guidance, and the first quarter was not the best way to start the year. A lower-interest-rate environment will help Whirlpool, but it can't be counted on. Meanwhile, Whirlpool faces challenges on the revenue and cost side of the profit equation.
As such, it remains a deep-value stock option, just less attractive than it looked before these earnings. On balance, the investment case is still intact. Still, the company will have to demonstrate that its 5% price increase is sticking before investors feel fully confident with its full-year guidance.
