Apparently there is a new washing machine setting: the tailspin cycle. On Friday, Maytag (NYSE:MYG) found that setting a bit harsh on the threads, as its shares fell $4.21, or 28%, to $10.89. So what's the tailspin cycle? Well, it goes something like this.
You're in an extremely competitive environment, fighting for market share with GE (NYSE:GE) Consumer Products and Sears Holdings' (NASDAQ:SHLD) Kenmore brand, making price increases difficult to get through. You add in increased product costs caused by rising steel and energy costs. You have a slowdown in sales at Best Buy (NYSE:BBY), a very important appliances retailer, followed by lowered sales guidance for the rest of the year. Throw in credit and equity downgrades, and your wife's best white sweater is coming out of the washing machine pink.
Could we have seen signs that something like this was coming? Hard to say. The market was well aware of the general competitive environment.
What was going on inside the company? From the Foolish Flow ratio, we can get an idea about how well products are moving. Let's take a look at these: At the end of 2003, the ratio was 1.35; the end of 2004, it was 1.42; and in a preliminary indication, it was 1.55 for the first quarter of 2005.
For the Flow ratio, lower is better, but notice that the numbers are rising. From the 2004 10-K filing with the Securities and Exchange Commission, we see that rising inventory and accounts receivables are the big contributors to the increase. The same happened in the first quarter of 2005. These are signs that products are not moving as quickly as desired, and the slowdown should prompt a deeper analysis.
One thing to remember is that Maytag is not a growth company. This is a mature company in a mature industry. In the past, it has been able to generate free cash flow (cash flow from operations minus capital expenditures). Maytag generated free cash flow of $135 million in 2002, $155 million in 2003, and $177 million in 2004, despite sharp declines in earnings in 2003 and 2004.
Can Maytag get back on track? Management says it has a plan to do so. But management always has a plan. That's its job: to make plans, ask shareholders to fund them, and then execute. The Maytag brands (which include Hoover, Amana, and Jenn-Air) are real and not going away anytime soon, but neither is the competitive environment. I am a value guy, and good deals can come from many different places in the stock market. And the thing that gets my attention now is the 6.6% dividend yield. To me, that reduces the risks substantially, assuming the dividend does not get cut. I wouldn't mind getting paid 6.6% to wait for a turnaround. Would you? It could offset the cost of replacing that sweater very nicely.
Fool contributor David Meier owns shares of GE but does not own shares in any of the other companies mentioned. The Motley Fool has a disclosure policy.
