- Whirlpool Corporation presents a favorable risk-to-return tradeoff in today’s uncertain macroeconomic environment.
- The recovery of the housing markets will continue to be a powerful catalyst for growth in Whirlpool’s North America business.
- The pending acquisition of Hefei Sanyo will turbo charge WHR’s presence in Asia.
- Results for WHR’s Europe, Middle East and Afria region (EMEA) have been strong.
- WHR’s valuation of less than 12x the consensus estimate for 2014 earnings per share is conservative.
Investors' myopic focus on WHR's recent quarterly results has created a buying opportunity for long-term investors. WHR shares posted a negative total return of 8% for the first five months of 2014 compared with a 4% increase for the S&P 500. WHR's underperformance is likely due to reporting earnings that missed analysts' expectations in both 4Q13 and 1Q14. In my opinion, the recent dip in WHR's shares has created a buying opportunity. The company blamed the misses on a multitude of idiosyncratic issues, such as weather and taxes.
Housing Recovery: A Potential Catalyst for WHR
The most compelling reason to buy WHR is the potential for strong sales growth in North America as the housing recovery enters its next phase. The chart below graphs US new home sales in units against US major appliance sales in 1990 dollars. There are several important points.
- The correlation between new home sales and inflation adjusted appliance sales is fairly strong. The correlation coefficient is positive 0.50.
- New home sales are still significantly below their pre-crisis level, but they are trending upward.
- Appliance sales are still below their peak in 2005.
The upward trend in new home starts could be a catalyst for a period of strong revenue growth and margin expansion for WHR's North America region. The National Association of Homebuilders (NAHB) forecasts new home starts of 1.086 million and 1.531 million for 2014 and 2015, respectively. The table below demonstrates that realization of the NAHB's forecast should bode well for WHR because the firm's revenue growth and margins tend to move in tandem with housing starts.
US Housing Starts and WHR North America Financial Performance
Change in Housing Starts (1 Year Lag)
|WHR North America Revenue||1%||-8%||-11%||2%||-2%||1%||6%|
|WHR North America Gross Margin||13%||10%||13%||12%||11%||16%||18%|
Source: NAHB (including forecast for housing starts in 2014 and 2015) and SEC.gov.
WHR's EMEA segment appears to have turned the corner after several years of declining revenues and gross margin compression. Soft demand within the Eurozone has plagued many global corporations since 2009. However, the table below hints at a favorable trend. In WHR's 1Q14 earnings presentation, management noted that EMEA's improvement reflected a combination of the industry's recovery and market share gains. EMEA's operating margin for 1Q14 was more than two percentage points better than its margin in 1Q13. These are likely to be long-term trends.
EMEA Financial Performance
|Revenue Growth (%)||12||14||-17||-3||2||-13||5||8|
|Operating Income / (Loss)||246||149||21||102||1||(51)||(4)||7|
Strategic Acquisition Expands Presence in Asia
WHR's planned acquisition of 51% of Hefei Rongshida Sanyo Electric Co. (Hefei Sanyo) will enhance its already strong geographic diversification (see table below) by significantly increasing its presence in Asia. WHR is already the leading appliance maker in North America, Latin America and many European countries. Hefei Sanyo, the third largest appliance maker in China, should reinvigorate growth for WHR's Asia region, which reported declining revenue in 2012 and 2013 due to weakness in India. Hefei Sanyo reported revenue of CNY 5.3 billion or US$864 million.
|Revenue by Region||2013||Pro Forma|
Source: WSJ, SEC.gov.
The price tag of the Hefei Sanyo acquisition isn't cheap. It values the Chinese appliance maker at almost 15x EBITDA for 2013 compared with less than 7x for WHR's enterprise value. However, Hefei Sanyo has reported strong growth over the past five years, and it gives WHR a solid platform in China.
Surprisingly Cheap Valuation
It is astounding that WHR trades at less than 12x analysts' expectations for 2014 earnings compared with a forward price to earnings (P/E) ratio of more than 14x for the S&P 500. The resurgence of homebuilding in the US, a rebound in EMEA and a key acquisition in Asia give WHR serious potential for strong earnings growth over the next five years. In my opinion, WHR is a rare gem in the midst of a market where valuations are becoming frothy.