Whirlpool's (WHR +2.95%) 7.2% dividend yield is highly enticing. It's undoubtedly a company that will do well in a lower interest rate environment, especially since the housing market should improve, encouraging discretionary spending on household appliances. Still, there's always a reason stocks carry such yields, and it often occurs in stocks about to cut their dividends.
While that may happen, something Home Depot's (HD +0.13%) management recently said supports the idea that Whirlpool might muddle through the current period. Here's the lowdown.
What investors are worried about with Whirlpool
There are no prizes for guessing that the principal concern over Whirlpool is the length and severity of the housing market slowdown, something guided by the interest rate cycle and housing market conditions. The bulls will argue that lower interest rates are always good for the housing market because they lower mortgage payment costs. The bears will say it's different this time because house prices haven't dipped as much as expected in a rising mortgage rate environment.
I'm mentioning this so readers will have an overall view of the driver of Whirlpool's earnings.
US Existing Home Median Sales Price data by YCharts.
The second concern is different and best expressed as follows:
- Whirlpool's disappointing sales and margin performance in its core North American major domestic appliance market in 2024 might not be due just to a weak market. Whirlpool might be losing market share and its competitive position -- a structural problem for the company.
Before getting into the gist of the argument, here's a look at Whirlpool's key North American major domestic appliance (MDA) margins. The table shows how earnings before interest and taxation (EBIT) margins have declined on a year-over-year basis. This is particularly concerning given that management started the year expecting to exit 2024 with a 10%-11% EBIT margin in North American MDA.
|
Whirlpool North America Major Domestic Appliance Segment |
Q1 23 |
Q1 24 |
Q2 23 |
Q2 24 |
|---|---|---|---|---|
|
Earnings before interest and taxation |
$274 million |
$135 million |
$290 million |
$163 million |
|
Earnings before interest and taxation Margin |
10% |
5.6% |
10.1% |
6.3% |
Data source: Whirlpool presentations.
A structural problem?
If the margin decline is a structural problem, then Whirlpool's margin challenges may be ongoing. Indeed, its competitor and rumored suitor, Bosch, noted in its 2023 annual report that competition was intensifying due to a "fundamental market shift" in "the home appliances sector as a result of market consolidation" and the "competitive pressure from Asian, in particular Chinese, suppliers has increased overall, and takeovers have led to shifts in the competitive environment."
What Whirlpool management said
Discussing the margin decline, Whirlpool's management said there was margin pressure due to a shift in the type of sales made. In a nutshell, replacement demand (the need to replace a broken refrigerator, washing machine, etc.) remains solid, but discretionary demand (often coming with planned kitchens and fundamental remodeling) was weak due to sluggish existing home sales.
Image source: Getty Images.
This pressures margins because replacement demand appliances tend to have lower margins than the premium products sold in discretionary demand purchases. If this is the case, Whirlpool's sales and margins will likely improve in a lower interest rate environment, and Whirlpool's problem would then be seen as temporary.
What Home Depot management said
Some support for the temporary over the structural argument came from Home Depot's second-quarter earnings presentation, with its executive vice president, Billy Bastek, saying, "We continue to see softer engagement in larger discretionary projects where customers typically use financing to fund the project, such as kitchen and bath remodels."
He referred to "pressure in the category like appliances"; meanwhile, CFO Richard McPhail highlighted, "components of the large project, kitchen, bath, flooring, lighting are all under pressure. And our customers tell us it's because that large project is being deferred."
Image source: Getty Images.
What it means to Whirlpool investors
Home Depot's commentary supports Whirlpool's argument that higher-margin discretionary spending is weak. While that signals ongoing pressure on Whirlpool, it also indicates that this is a temporary, not a structural, problem that will improve as the housing market improves.
Home Depot is highlighting weakness in precisely the areas that Whirlpool said there was weakness. It would have been more concerning if Home Depot had not said this, as that would have implied it was a Whirlpool problem, not one related to the interest rate cycle.
As such, while there's a near-term risk, Whirlpool remains a good option for income-seeking investors.
