From this week's Barron's (subscription required to read, so I copied it in it's entirety.)
FEATURE
Whirlpool Enters Up Cycle
The international appliance leader was dinged by a strong dollar, but smart acquisitions and cost cutting will help boost its shares by 25%.
By AVI SALZMAN
November 21, 2015
From Boston to Beijing, Whirlpool Machines clean the world’s laundry and wash its dishes. The company’s breadth of products and its manufacturing-and-distribution network have made it the global leader in household appliances. But that success has made it vulnerable to instability overseas, and agitation in markets thousands of miles from Whirlpool’s Michigan headquarters can sink the stock.
This year, Whirlpool (ticker: WHR) shares have swirled down the drain, dropping 18%. The dollar’s rise and the decline of Brazil’s economy and currency have proved especially problematic. In its third-quarter earnings release, the company reduced earnings-per-share expectations for the year to $12 to $12.50 from $12 to $13. Currency effects alone reduced revenue by more than 10% in the most recent quarter. In Brazil, the weak real and slumping demand will strip 50 cents off total 2015 EPS, the company says.
A new laundry machine attracted attention at a January trade expo. Photo: Courtesy of Whirlpool
But investors may be overreacting. Brazil accounts for about 15% of revenue, and should diminish in importance as sales in Europe and Asia rise following major acquisitions there.
Investors who buy Whirlpool stock now, when it’s at 11.1 times 2016 earnings expectations, are likely to profit handsomely. Earnings are expected to rise annually at an average of 17% for the next few years. As a result, Whirlpool should achieve $15 in annual EPS within the next 18 months and could fetch an earnings multiple of at least 13 times, toward the high end of its historical valuation, once concerns dissipate about the global economy. Shares could rise to $200 from a recent $160. Add a 2.3% dividend yield, and investors could see a nearly 30% total return.
“The problems in Brazil are probably 80% over, and they’re already in the stock. And Whirlpool’s deals in Europe and China are game changers,” says John Harloe, a portfolio manager at Barrow, Hanley, Mewhinney & Strauss, which has owned the stock for about seven years.
Benton Harbor, Mich.–based Whirlpool was started in 1911. It sells washers and dryers, stoves, dishwashers, refrigerators, and kitchen appliances under more than a dozen brands including Maytag, KitchenAid, and Consul. About half of its sales come from North America. Whirlpool has dominant market share for appliances in the U.S., at 39%, and across the globe, at 10.9%, says IBISWorld.
Whirlpool made $650 million, or $11.39 per share, last year on $19.9 billion in revenue. This year, the company is set to net $851 million, or $12.18 per share, on $21.2 billion in revenue. Analysts expect EPS to rise to $14.45 in 2016, a 19% jump.
Acquisitions—notably Whirlpool’s 2006 purchase of Maytag—have fueled its growth. “The management transformed a nonbranded low-margin equipment manufacturer dependent on Sears into the global leader in branded home appliances,” says Robert Wetenhall, an analyst at RBC Capital Markets.
Whirlpool has a remarkable track record of lifting earnings even when sales are rising moderately. Its revenue rose 5% from 2008 to 2014, but earnings rose 55% as the company cut capacity and costs.
The company can replicate that success in the next few years. Whirlpool bought Italian appliance maker Indesit last year for $1.4 billion, doubling its capacity in Europe. By 2017, Whirlpool expects to wring $350 million in costs out of the acquisition. Whirlpool is targeting at least 7% margins in Europe, the Middle East, and Africa by 2018, versus 3% in 2014. Harloe thinks that Indesit should add $5 a share to Whirlpool’s earnings and $75 to the stock. “It takes them from a mediocre position in Europe and vaults them to No. 1 or close in every [European] country.”
IN CHINA, WHIRLPOOL has expanded its reach and should see large benefits. Last year, the company bought a controlling stake in Chinese appliance company Hefei Sanyo, expanding its distribution network in China to 30,000 outlets from 3,000. Whirlpool is targeting 8% margins in that business by 2018, up from about 3% last year. Asia accounts for 6% of Whirlpool’s sales, more than doubling in the third quarter on a year-over-year basis.
In North America, Samsung and LG have gained ground in recent years, and investors worry that the Korean companies will sell products at break-even to take share. In the third quarter, Whirlpool’s North American sales trailed the overall appliance market, a blip it blamed in part on delays in getting new products to sales floors. Management is confident that Whirlpool will keep pace this quarter while avoiding a price war. “We believe in earning market share, not buying market share,” says CEO Jeff Fettig in response to a question on the third-quarter call. Fettig was not available to comment for this article.
North American sales should benefit once U.S. housing construction—still 25% below normal levels—returns to previous rates. Historically, Whirlpool has been able to raise prices and boost volume when housing grows.
