Despite seeing shares climb 25% in 2013, I believe shares of appliance maker Whirlpool Corporation (WHR) are undervalued with several growth drivers in the works. The company behind popular brands Whirlpool, Maytag, KitchenAid, Jenn-Air, and Amana, should see shares trade higher and set new 52 week highs ($138.33) within the next three months.
On Tuesday, Whirlpool Corporation announced it was purchasing a majority stake in Hefei Rongshida Sanyo Electric, a Chinese appliance company. Whirlpool is paying $552 million to acquire 51% of the Chinese company's shares. This is a huge move for Whirlpool, as it strengthens their position in an area with a growing middle class, and gives them access to a more affordable appliance line to complement their higher end products in the regions.
Whirlpool chief executive officer Jeff Fetig had this to say of the deal, "Whirlpool has a strong presence in China's higher tier segments, this acquisition allows the company to build on, complement, and grow its position in the emerging Chinese market and to leverage our global enterprise for greater efficiencies."
Hefei Sanyo, started in 1994, makes appliances under the brands Sanyo, Rongshida, Royal Star, and Diqua. The company makes washers, refrigerators, and microwave ovens. In 2012, Hefei Sanyo saw revenue of $636 million, EBITDA of $59 million, and net earnings of $48 million.
Whirlpool gains a huge nationwide distribution in China. Similar to what it has done in Brazil, Whirlpool should be able to integrate its own products into the country. The company's Asian region remains its lowest sales segment, but has seed growth. In the most recent second quarter, Asian sales were only $246 million. This represented only 5% of second quarter sales. With this acquisition, Whirlpool should see a boost in the Asian region and could soar past revenue targets for fiscal 2014.
The deal is expected to close by the end of 2014 and will be accretive within the first full year of integration.
Strength in Brazil
Another key factor powering Whirlpool sales higher is the recent stimulus in Brazil. Whirlpool, who has a strong presence in Brazil, has been one of the biggest winners from the deal, amongst American companies. Brazil is offering subsidies of $8.8 billion spread amongst 3.4 million low-income families in Brazil.
The subsidies allow families to purchase furniture and home appliances with the stimulus money. In December, Brazil also extended recent tax cuts on appliances, which should power sales going forward. In the second quarter, Whirlpool saw sales grow 6% in the Latin American region. Sales excluding tax credits would have been up 8% from the prior year.
In June, Whirlpool announced a collaboration with popular at-home carbonation giant SodaStream (SODA). The deal will allow Whirlpool to enter the home carbonation market by using SodaStream's technology under Whirlpool's own KitchenAid brand.
This news definitely bears watching, as Whirlpool enters a new category and is partnering with the market leader. The appliances will have a retail launch in the fourth quarter of 2013. Any new details on the partnership will most likely send shares higher.
Whirlpool shares trade at $132.10 at the time of writing. This puts shares slightly below a 52 week high of $138.33. Despite seeing shares rise 25%, investors are undervaluing current and future earnings. In fiscal 2013, analysts expect the company to post earnings per share of $9.95. In fiscal 2014, earnings are expected to come in at $11.96. This represents price to earnings ratios of 13.2 and 11.0 respectively.
Analysts expect revenue to grow only 3.1% in fiscal 2013 and 4.6% in fiscal 2014. Take into account the growth measures I listed above, along with a rebounding housing market and you can see how these revenue targets might be conservative.
With shares trading at only 11 times next year's projected earnings, shares of Whirlpool look cheap on valuation. Add in the growth of several areas and the potential home run acquisition in China and you should see Whirlpool shares jump. I think shares of Whirlpool will see $150 within 12 months, representing a return of 14%.