Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Whirlpool (WHR) continued their impressive winning streak last week. Shares of the manufacturer of home appliances rose almost 10% over the past trading week, sending shares to their highest levels since 2010. As a result of last week's gains, shares have already more than doubled in 2012.

Third Quarter Results

Whirlpool reported its third quarter results last month in October, which were well received by the market. Whirlpool reported third quarter revenues of $4.50 billion, down 2.8% on the year. In constant currencies, revenues would have risen to $4.8 billion.

Gross profits rose to $704 million, as gross margins rose by 330 basis points to 15.7%. Operating profit rose 58% to $214 million, despite $62 million in restructuring charges. Operating margins rose 190 basis points to 4.8%.

Net income fell 58% to $74 million, as last year's third quarter earnings were favorably impacted by a $123 million tax benefit. Diluted earnings per share fell to $0.94 per share. Earnings from continuing operations rose from $0.29 to $1.80 per share.

Detailed Information

North America

Revenues in North America rose 2.1% to $2.42 billion. Operating profits rose to $227 million, with operating margins expanding to 9.3%, up 670 basis points compared to last year. Whirlpool sticks to its full year forecast that the North American industry will be flat to decline 2%. Whirlpool remains optimistic amidst continued innovation, revenue growth and capacity reductions, partially offset by higher raw material costs.

Latin American

Revenues in Latin America came in unchanged at $1.21 billion, while operating profits fell 20% to $118 million. Operating margins fell 240 basis points to 9.8%. Whirlpool boosted the industry demand growth forecast for the region to 7 to 10%.

Europe, Middle-East & Africa

The European operations remain under pressure. Net sales fell 19.5% to $703 million, partially driven by a weak Euro. The division reported an operating loss of $35 million, as operating losses rose to 4.9% of total sales. The European market is expected to decline by 2 to 3% for the year. A weak Euro and weaker demand are putting pressure on results, but Whirlpool expects a recovery in the fourth quarter.

Asia

Asian sales fell 6.2% to $201 million. Operating profits improved to $7 million, for operating margins of 3.8%. Full year industry sales are expected to fall between 5 and 7%. Revenues were up 2% in constant currencies, driven by innovation, partially offset by a strong dollar.

Outlook

For the full year of its fiscal 2012, Whirlpool guides for diluted earnings per share of $5.00-$5.50 per share. Ongoing business operating earnings per share are expected to come in between $6.90 and $7.10.

Whirlpool will take an expected $78 million in capacity reduction charges in the final quarter, marking year-to-date charges to $250-$270 million. Total charges for 2013 are expected to come in around $160 million.

Valuation

Whirlpool ended its third quarter with $518 million with cash and equivalents. The company operates with $2.45 billion in short and long term debt, for a net debt position of $1.93 billion.

For the first nine months of its fiscal 2012, Whirlpool generated sales of $13.4 billion. The company net earned $279 million, or $3.53 per diluted share for this period. Full year sales could come in around $18 billion, with earnings coming in around $420 million.

The market currently values Whirlpool at $8 billion. This values the firm at 0.4 times annual revenues and 19 times reported earnings, and 14-15 times earnings from continuing operations.

Whirlpool currently pays a quarterly dividend of $0.50 per share, for an annual dividend yield of 2.0%.

Some Historical Perspective

Year to date, shares of Whirlpool have more than doubled, trading with gains of 117%. Shares rose from $47 in January of this year, to highs of $79 in March after the company issued a strong outlook. Shares fell back to $55 in June before shares started to rise again. Shares rose on strong third quarter earnings to its highs of 2012. Shares of Whirlpool are currently exchanging hands at $103 per share.

Shares of Whirlpool fell from $115 in 2007 to lows of $20 in the beginning of 2009, during the financial crisis. Shares rose back to $110 in 2010 before falling back to $50 earlier this year. Between its fiscal 2008 and 2012, Whirlpool saw revenues stagnate from $18.9 billion in 2008, to an expected $18 billion this year. Net income remained stable around $420 million in both years.

Investment Thesis

Shares of Whirlpool have seen a great run so far this year. The company has promised strong margin growth, and is on track to reach those targets. For the third quarter, the US business reported strong operating margins of 9.3%. On a global basis operating margins came in at 6.0% and Whirlpool anticipates that 8.0% operating margins might be attainable, as early as the fourth quarter of this year.

Whirlpool is benefiting from strength in its North American business which is thriving on a recovery in the housing markets and strong rental markets. The company furthermore guides for 5 to 7% revenue growth in the coming years, a level not yet attainable.

As a result of the ambitious revenue growth targets, and operating margin expansion, earnings growth is expected in 2013. The problem for investors is that the stock performance has outpaced earnings growth, thereby boosting valuation multiples. Shares are currently trading at 14-15 times 2012s continued earnings. This multiple could come down next year.

Despite the appealing earnings growth, I remain on the sidelines. The cocktail of earnings growth accompanied by increased valuation multiples makes me cautious. Yet shares are no convincing short opportunity given the strong outlook for 2013.

Source: Whirlpool: Valuation Risks Increase As Share Performance Outpaces Earnings Growth