Shares of Whirlpool (NYSE:WHR) hit a 52-week high yet again on Thursday. Let's take a look at how it got there and see if clear skies are still in the forecast.
How it got here
Whirlpool may not seem like a logical buy in a tight spending climate, but it's been making all the right moves to send shares significantly higher since the year began.
At the heart of Whirlpool's turnaround has been strength in the housing industry and firmer pricing of its products.
Housing has responded positively on both sides of the board. Homeowners are choosing to remodel in increasing numbers, which has extended benefits to companies such as hardwood flooring specialist Lumber Liquidators (NYSE:LL), which showed a 12% rise in comparable-store sales in its latest quarter, and appliance makers like Whirlpool. Also, record-low lending rates have lured home buyers back into the market, which had invigorated domestic appliance sales. One reason Home Depot (NYSE:HD) has cashed in recently is this dual strength from the homeowner and commercial sides of the housing sector.
In addition, with the housing industry finally finding some footing (say that three times fast!), Whirlpool has been able to enact price increases to counter volume declines experienced in Europe. A mixture of cost-cutting programs and price increases boosted EPS $0.20 past Wall Street expectations just over a week ago and allowed Whirlpool to boost its full-year guidance to a range of $6.90 to $7.10 from a previous estimate of $6.50 to $7.
What could derail Whirlpool
Just because Whirlpool was able to raise its forecast doesn't mean that its path ahead isn't without its fair share of clouds.
To begin with, Europe's ongoing debt crisis has made a mess of spending in the region and it's unlikely to respond in a positive way anytime soon. That means price hikes are pretty much off the table for Whirlpool in Europe and it'll need to put its eggs primarily in the North American basket if it wants to grow. Whirlpool's large European rival, Electrolux (NASDAQOTH:ELUXY) actually reported its results just one day prior to Whirlpool's and noted that it would be cutting production in response to weak European demand.
Even the U.S. market could show signs of trouble for Whirlpool in the not-so-distant future. Although new home purchases have been trending in a positive direction for some time now, consumer spending has been generally weakening, and the United States' second-largest home improvement chain, Lowe's (NYSE:LOW), which is significantly more reliant on appliance sales than Home Depot, has been vastly underperforming. These are all yellow flags that Whirlpool's growth spurt in the near term may be short-lived.
Now for the $64,000 question: What's next for Whirlpool? That's going to depend on the strength of the U.S. housing sector, Whirlpool's ability to raise prices and control costs, and the state of the European appliance market.
Our very own CAPS community gives the company a three-star rating (out of five), with 81.5% of members expecting it to outperform. My personal CAPScall of outperform on Whirlpool has absolutely cleaned up, rising by 90 points since my selection a year ago.
However, one year to the date of that pick, I'm going to lock in my gains and run for the sidelines by closing my outperform CAPScall. It's not that I don't feel Whirlpool has a solid future in the appliance industry -- because I do. But I'm having a hard time grasping a doubling in the company's valuation considering that European sales are going to be a drag for years to come and the U.S. housing industry is still on shaky footing. Price increases and cost-cutting have done a good job of masking flat volume growth, but I'll need to see either Whirlpool's share price fall or appliance volumes rise before I jump back into an outperform CAPScall.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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