Whirlpool's (WHR +2.19%) recently released second-quarter earnings were mixed. It's never good news when a company cuts its full-year guidance. On the other hand, it's no surprise that companies reliant on consumer-discretionary spending are reducing guidance, given that expectations for interest rate cuts have been pushed out.
What does it all mean for Whirlpool investors? Here's the lowdown.
Whirlpool looks like a great value, but...
To make a long story short, there's a good chance that Whirlpool will bring more bad news to investors in 2024, but there's an even better chance that the stock and the company will be in better shape in a year. In other words, Whirlpool is an attractive stock, but don't consider buying it if you can't tolerate some significant near-term risk.
NYSE: WHR
Key Data Points
Unfortunately, it's difficult to predict the direction of interest rates and, therefore, anticipate the affordability of a monthly mortgage payment and the future of the housing market. Whirlpool's CEO Marc Bitzer was explicit on the recent earnings call when he noted that the company's original 2024 guidance had assumed "like most people, that we would start seeing a housing recovery" in 2024 "based on the assumption that we would see interest rates, and therefore, mortgage rate reductions, and it didn't happen."
How a weak housing market impacts Whirlpool
A sluggish home sales environment is bad for Whirlpool because home sales drive discretionary major domestic appliance (MDA) demand. That's not only bad news for sales but also creates an unfavorable margin mix because discretionary demand tends to be a higher margin than the replacement demand that Whirlpool's sales are shifting toward in 2024.
As management outlined, replacement demand tends to come from needing to immediately replace an old refrigerator or washing machine, while discretionary demand can involve planned kitchens with premium products.
In addition, Whirlpool's attempts to drive growth through promotional activity in the second half of 2023 and much of the first half of 2024 fell flat due to the lack of response from discretionary customers; replacement customers buy new equipment and don't wait for promotions.
|
Whirlpool Full-Year Guidance |
April |
Current |
|---|---|---|
|
Sales |
$16.9 billion |
$16.9 billion |
|
Major domestic appliances North America EBIT margin |
9% |
7% |
|
Ongoing EBIT margin |
6.8% |
6% |
|
Free cash flow |
$550 million to $650 million |
$500 million |
|
Ongoing earnings per share (EPS) |
$13 to $15 |
$12 |
Data source: Whirlpool presentations. EBIT = Earnings Before Interest and Taxes.
It gets worse. Whirlpool also faced challenges due to unfavorable exchange-rate movements in Latin America. In addition, management informed investors that the company's cost-cutting plan of $300 million to $400 million for this year is on track to meet the lower end of the target at $300 million.
What could go wrong
There are no prizes for guessing that the longer interest rates stay relatively high, the greater the danger of further pressure on Whirlpool's sales, margins, and free cash flow (FCF). The latter is a particular concern as Whirlpool's dividend payment is about $400 million, and FCF of $500 million in 2024 would only thinly cover it. That's not to mention that Whirlpool has a long-term debt of $6.3 billion.
As such, it's not hard to think of a scenario where a deteriorating housing market environment forces another guidance reduction and a dividend cut to free up cash to prioritize debt reduction. I argued earlier that a takeover of Whirlpool might not be a bad idea for all parties.
Image source: Getty Images.
What could go right
On the other hand, a lot of things could go right. Whirlpool is a major beneficiary of a lowering of interest rates, and the market will waste no time in pricing favorable outcomes if and when rates start to come down. In addition, the primary issue is in the MDA segment. All the other segments are performing well, notably the small domestic appliance (SDA) global segment, where Whirlpool is gaining ground with espresso machines, rice and grain cookers, etc.
Moreover, the decision to curtail promotional activity and raise prices in the middle of the quarter helped MDA North America's margin increase from 5.6% in Q1 to 6.3% in Q2. Management believes it will end the year with MDA North America's EBIT margin at 9% as the price increases take full effect and cost benefits drop into the bottom line.
A stock to buy?
Trading on just 8.3 times management's estimate for full-year earnings, Whirlpool is an attractive stock. Still, there's a good chance the pressure on discretionary appliance sales will continue in 2024. The truth is probably some combination of the "wrong" and "right" scenarios discussed above. That won't please investors who worry about the near term, but long-term investors who accept that forecasting the timing of interest rates is a thankless task won't be concerned.
