Although retail investors have yet to come back to the stock market in full force, the economy is beginning to gain traction. The Bureau of Economic Analysis shows that real GDP is above where it was in 2008, the Bureau of Labor Statistics shows, although still well off the peak seen in 2008 (we are at about the same place that we were in 2001), that employment numbers have improved over the last four quarters, the Census Bureau is reporting that manufacturing is almost back to its 2008 levels and that retails sales are above their 2008 levels.
(The above chart shows the imporoving economy since 2008)
Despite the improving economy there are still a number of stocks have not experienced a full rebound.
I believe Whirlpool Corporation (WHR) may be just such a company. Although up about 100% since the lows of 2008, it trades at just 10x TTM earnings and offers a consistent quarterly dividend. The company carries a lot of debt and has razor thin margins, however given the improving economy, especially in the housing sector, these negatives should be overshadowed by an expanding top line. I have begun to look more closely at the stock and my initial view is that the stock could be worth over $110 per share, or 30% above its current trading value.
Whirlpool has been struggling somewhat over the last five to six years. By far Whirlpool’s largest operating region is North America, which accounts for over half of all sales. However since 2006 sales in North America have declined whereas sales in Asia, which account for a mere 4% of total Whirlpool sales, are up nearly 50%. The number of units Whirlpool sold in North America in 2009 was nearly 10% less than the number sold in 2004. By comparison, globally Whirlpool sold 7% more units in 2009 than it did in 2004, in large part because of Latin America and Asia.
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Few would disagree that the modern home needs a washer & dryer and other similar appliances; however it does not appear that Whirlpool has sufficient sales, in dollars and units, to support this conclusion.
Two possible inferences can be drawn from the above facts. Either (a) everyone who could ever want a washer has one, and Whirlpool will continue to experience flat or declining sales, or (b) after a severe recession there is pent up demand and consumers will start to buy significant number of appliances over the coming years.
I believe that there is a pent up demand, that should help fuel top line expansion at Whirlpool
After a weak 2009 things have started to improve. In each quarter of 2010 unit shipments in each geography region has increased. Units shipped in North America increasing by mid single digits and those shipped in Asia and Latin America by between 15% and 30%.
Appliance sales at Whirlpool are in large part tied to the housing market and after years of hearing about a slow down in the housing sector things are starting to improve. In early January, David Crowe, the chief economist at the National Association of Home Builder’s stated that “housing starts [are set] to rise 21 percent from last year’s level and sales to improve 26 percent from 2010.” Frank Nothaft chief economist at Freddie Mac puts it a lower, but still respectively 10%. Each new home will require new appliances, which should give a nice boost to Whirlpools top line.
Similarly, after a couple of years of homeowners tightening their belts spending on remodeling and renovation is starting to increase. In what Harvard calls the Leading Indicator of Remodeling Activity, home improvement spending is expected to grow 6.5% in the third quarter of 2011.
Over the last five years Whirlpool has traded at between 6x and 19.2x and TTM earnings. It was trading at 6x earnings at the heart of the economic downturn in Q4 2008 and at 19x in 2009 Q3 and again 2010 Q1; each immediately following a significant upward price move. After the significant price move from 2009 Q4 to 2010 Q1 Whirlpool’s stock price has drifted back down to levels seen at the end of 2009.
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During this five year period Whirlpool averaged 12x TTM earnings and during the last part of 2007, prior to the economic downturn Whirlpool traded closer to 14x earnings. The S&P 500 is currently trading at around 14x earnings. General Electric (GE), which sells more than just appliances, is at 18x.
On an absolute basis 10x earnings for a company with growing earnings appears cheap. Likewise, based on how WHR has traded in the past, especially in an expansionary environment, the stock continues to appear cheap.
Dividends and Cash Flow
WHR has paid a dividend every quarter since the late 80’s. Although by the mid to late 90’s Whirlpool dividend was higher than it is now, Whirlpool has paid the $0.43 quarterly dividend consistently since the start 2004. It is true that there are better dividend plays (notwithstanding that I no longer own CenturyLink (CTL), (please see for example my recent article on CTL) a 2% yield is not bad for a company trading at such a low multiple. The Company pays out approximately 20% of is earnings as a dividend. Whirlpool has nearly $18.00 per share of cash on its balance sheet and generated in the last year nearly $20 a share of cash flow from operations. Most of WHR’s money goes towards property, plants and equipment and paying down long term debt. Nonetheless, Whirlpool appears to have a sufficient cushion to support the conclusion that the dividend is safe.
One of Whirlpools largest drains on cash is debt payments, including both interest and principal repayments. The company pays out over 200M annually in interest payments and will owe between 300 and 400M over each of the next 3 years as principal payments. The flowing table, taken from the company’s 10K, summarizes these principal repayment obligations.
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Depending on the company’s ability to rollover debt, these payments can be a large drain Whirlpools and may pose a risk not only to the dividend but also the company as a going concern.
Notwithstanding that it took a large hit in 2008 and 2009, the company revenue remained positive during the recent economic downturn. The revenue has since rebounded and in the final quarter of 2010 the revenue approached the 2007 levels. Although Whirlpool has an EBIT margin of only 4%, it has been able to increase its margin in recent years; in 2008 and 2009 the EBIT margin averaged 2.6%. By contrast prior to the economic downturn the EBIT margin was over 5%. Additionally Whirlpool expenses nearly 550M (3% of revenue) on depreciation, a non-cash item.
On an annual basis 2010 revenue was 6% lower than what was seen in 2007 whereas 2010 net earnings were only 2% lower than 2007, this suggests net margins may be improving just as gross margins are.
As noted above, it appears that Whirlpool is well positioned to see an expansion in it’s revenue line. With a historically stable net margin of just under 3%, and a slight trend towards expanding margins, we should expect Whirlpools net income to continue to grow.
Although Whirlpool carries a lot of debt; with a lot of cash and a steadily improving economy the company seems well placed to continue to thrive over the next years. Likewise at just 10x TTM earnings the stock also seems well placed to do well in the current economic environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.