Many investors believe that the housing market is headed for a recovery, and one CEO believes his company will be the biggest beneficiary. The most surprising thing about this is that the company in question isn't directly related to the housing market, which could make it an under-the-radar idea for a select few in the know.
However, does the housing market even need a recovery? According to Zillow, the average value of a home in the U.S. is over $360,000 as of this writing. That's up 3% year over year and right at its all-time high. This would seem to indicate that the housing market is strong and that no recovery is needed.
It's true that U.S. home values are strong. However, there are other important statistics to consider in the housing market. The big problem right now is existing home sales. As the chart below shows, sales have dropped fast in recent years and are near historic lows.
US Existing Home Sales data by YCharts
There are multiple factors at work here. For homeowners, many have mortgages with low interest rates and consequently are motivated to not sell their homes. For would-be buyers, high prices combined with high interest rates are pushing down payments and monthly payments out of reach.
Therefore, home prices are fine, but home sales are down in the dumps and need a recovery. In this context, home appliance company Whirlpool (WHR 0.76%) is struggling at the moment. But CEO Marc Bitzer believes the company will be the biggest beneficiary of a recovery -- a recovery that could begin later this year.
What does any of this have to do with Whirlpool?
Washing machines, dishwashers, kitchen mixers, and more were once considered luxury items, but in modern times they're considered necessities; almost everyone owns these home appliances. And chances are high that at least one of Whirlpool's brands -- Whirlpool, Maytag, KitchenAid, and more -- are in most homes as well.
It may not be obvious to everyone, but Whirlpool's sales are highly correlated with existing home sales. The chart below shows that as existing home sales fall, so too does revenue for Whirlpool.
WHR Revenue (TTM) data by YCharts
It's not uncommon for sellers to upgrade appliances prior to putting a home on the market. It's also not uncommon for buyers to upgrade outdated appliances when they move in. Anecdotally, I did this last time I moved -- it made more sense to buy a new washer and dryer rather than move my outdated appliances that were starting to break.
Thinking about the big picture, the good news for Whirlpool's shareholders is that its slumping sales aren't its own fault -- the housing market is slow and business is consequently slow. Considering its still a top player in the space, one would expect sales to bounce back when market conditions are better.
NYSE: WHR
Key Data Points
Market conditions could improve in the back half of 2024. According to CME FedWatch, interest rate traders see a 96% chance that the Federal Reserve lowers its rates soon. This could be a move that finally stimulates existing home sales, indirectly lifting appliances sales as well.
There are reasons for optimism, including Whirlpool's position in its market and a potential stimulation of the housing market later this year. However, to be clear, there are plenty of problems for Whirlpool right now. Inflation increased its manufacturing costs, it has a net debt position, and most of its free cash flow goes to paying its dividend. The longer it takes for sales to bounce back, the harder this financial situation becomes.
Moreover, it's true that the Federal Reserve will likely cut interest rates later this year. But the rate cuts aren't guaranteed to be enough to stimulate a meaningful recovery in the housing market. It's likely that homeowners will still be reluctant to sell because their mortgage rates will still be lower. And potential buyers might still struggle to come up with down payments, considering home values are high.
My point is that Whirlpool stock isn't a sure thing today. That said, there are reasons to think that business could pick up in the near term. And if that happens, this is quite the value stock today.
Whirlpool reported financial results for its fiscal second quarter of 2024 on July 25. And according to management commentary, the company expects about $500 million in free cash flow this year. Compared to its market cap of $5.4 billion, this means that it trades at less than 11 times this year's expected cash flow, which is a bargain. Remember that free cash flow would likely surge when the business bounces back.
In conclusion, Whirlpool believes it's one of the best ways to invest in an eventual recovery in the housing market, and there are reasons for optimism. However, there are also reasons to be cautious. Therefore, value investors need to be careful not to get overenthusiastic about this investment opportunity.
