Whirlpool: Currently, A Bad Business to Be in

Optimistic Fair Value Estimate: $50

Strategy: sell June 2009 call strike $50, currently trading at $3.25

Result: Income yield of about 7% if option stays out the money, net short position at effective price of $53.25 if the options land unprofitable.

By all means, Whirlpool (WHR) is not necessarily a bad company, nor do I have anything against management. This is simply a bad business to be in at this time. With about 1/2 of sales coming from North America, it looks particularly geared to the success of a US recovery. With the run-up in its stock price, almost an 100% gain in a few short months, this may be the best way to participate in a languishing company and an overbought US stock market.

Management expects Income to come in at $3-4/share in 2009, or about $300 million on the high end. With about $475 million in depreciation/amortization, OCF comes in at around $775 million. Capital expenditures are expected to range $400-450 million, so my free cash flow calculation yields about $375 million.

Invested capital, Assets minus (ST liabilities - ST debt + cash), yields approximately $880 million. That's a 4.3% ROIC using free cash flow of $375 million. The company doesn't break down capex into growth reinvestment and expansion capex, and that's ok - let's be optimistic and assume they earn a 4% ROIC on their total capex.

Free cash flow growth at a rate of 4% per year:

2009	375.00
2010	390.00
2011	405.60
2012	421.82
2013	438.70

I guess that's not too bad. In 2010 the company can be trading an enterprise value of 14x FCF. If I can be even more optimistic the company can hoard up all cash flow produced and keep capex low, leading to a potential enterprise value of$4.2 billion instead of today's $6.2 billion. Using the former we get a EV/FCF multiple of 9.5x. At $50 a share that multiple comes in a hair above 10x.

Briefly looking at some technical indicators also suggest a topping out pattern with RSI above average and the MACD trending above its signal line. My best reasoning for this explosive run? Shorts are covering their positions in this short-run bull market. Even if markets continue to trend upward this one looks positioned for a fall with practically 0 potential catalysts to suggest otherwise.

Also note the "optimistic fair value estimate," a departure from my "conservative fair value estimate" annotation since this is a net short position in the underlying shares.

Disclosure: short call options described above