Is Whirlpool Fairly Priced?

Sep.11.13 | About: Whirlpool Corporation (WHR)

Decreasing unemployment coupled with persistently low interest rates have helped in reviving the US housing sector once again. The improving housing sector has also helped in boosting the performance of many related industries. One such industry that has been free riding the boom in the housing sector is the home appliances/consumer electronics industry.

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Source: National Association of Home Builder; Association of Home Appliance Manufacturers

As exhibited in the graph above, the consumer electronics industry is highly dependent on the housing sector in general and specifically on the new home sales and new household formations. The demand for consumer electronics started falling after the mortgage crisis hit the economy as the new home sales began to decline. However, the industry's statistics are gradually improving as the economy is recovering from the financial crisis. The housing sector started its recovery in late 2011.

Within the industry, Whirlpool Corporation (NYSE:WHR) stands out as the number 1 worldwide brand in consumer electronics and a company that is likely to benefit greatly from the housing sector recovery. Realizing this direct relationship, the market has shown a tremendous response and the company's price has more than doubled in the last two years. Due to the potential for improved performance and high price appreciation, I look forward to analyzing the fundamentals of this company in order to identify whether this stock offers a favorable investment opportunity.

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Source: Ycharts

Historic Performance

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Source: Company Financial Reports

The company has experienced some of its most volatile years in terms of net sales. The sales initially fell in 2009. Then, for the next two years sales revenue was growing once again. However, the trend reverted once again in 2012. The initial decline in sales in 2009 was primarily due to the decrease in shipments by 4.4 percent and unfavorable price/mix and currency movement. The net sales increased by 7.4 percent and 1.6 percent in 2010 and 2011, respectively, due to the increase in the number of shipments, higher Brazilian Government Export Incentive Program Credits (BEFIEX) and a favorable currency movement. In 2012, the company's revenues fell by 2.8 percent largely due to a decline in shipments by 2.3 percent, lower BEFIEX credits and an unfavorable currency movement.

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Source: Company Financial Reports

Despite the volatility experienced in the company's top line, Whirlpool was able to provide somewhat stationary returns to its shareholders due to the tax benefits received by the company. The US energy tax credits peaked in 2010, which in turn boosted the company's earnings and return measures. Apart from this, the restructuring program adopted by the company has also helped it in cutting costs and improving its margins over the years.

Regional Focus

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Source: Company Financial Reports

The company has gradually diversified its business by primarily moving away from the slow growth markets of North America and Europe and increasing its presence in the emerging markets of Asia and Latin America. This diversification has helped the company in stemming the decline in its revenues as it increased its exposure in the high growth economies.

Shipments to Latin America and Asia have increased at an average annual rate of 9.7 percent and 11 percent, respectively, over the last 5 years. Asia has been the fastest growing market for Whirlpool but the company's penetration level in Asia has been the lowest as compared to other regions. This is because the company had primarily targeted the high end market in Asia. However, the recent news of an acquisition of a majority stake in a Chinese company will help the company in increasing its outreach in the Chinese market. Thus, highlighting the company's shifting focus towards enhancing its outreach in the Asian markets.

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Source: WHR Investor Presentation

Promising economic fundamentals in the emerging economies and their high population growth will provide an attractive growth opportunity to the company. I strongly believe that the company should pursue its expansion into these markets.

Signs of Recovery in the Housing Sector

The collapse of the housing sector was at the forefront of the recent economic recession in the US. However, now the housing sector is back on track. The persistent low interest rate environment, improving employment levels and rebuilding consumer confidence has once again revived the demand for new houses. Rising housing starts, increasing home prices and higher purchasing power have all contributed in the recovery of the housing sector.

As shown above, the housing sector has a strong and positive relationship with the home appliances industry and consequently, it also has a direct relationship with the performance of Whirlpool. As the US market is still a large contributor of the company's revenues and profits, a change in the US housing market may significantly affect the company's overall performance. This has been evident from the poor performance of the company during the US economic recession. However, the company has emerged from the ruins in much better health. Greater geographic diversification and corporate restructuring has helped in improving the company's performance. Thus, a rejuvenation of the US housing sector will greatly improve Whirlpool's performance.

Presently, the rise in the interest rates has slowed down the economic growth in the US. However, I believe that because of the importance of the housing sector in reviving the US economic growth, the Fed will not taper back its bond buying. The slow household formation during the recession also had an effect on the housing market. However, the trend is reversing in the recent periods. To sum up, the economic fundamentals seem strong enough to continue spurring the growth in the US housing sector, which will in turn boost the demand for home appliances.

Conclusion

Apart from the US market, the stabilization in various markets around the world will continue to create the demand for Whirlpool's products. The recovery in Eurozone will also provide growth opportunities for the company.

Despite having a positive outlook, I believe the stock is slightly over priced. A quick reconfirmation can be made from the price to earnings ratio of the company, which is greater than its peers and the industry average. Hence, I would recommend a hold strategy for investors who have already invested in the company while for others, it would be better to wait until the market pulls back.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.