It’s not easy selling $3,000 refrigerators and top-end dishwashers when housing construction is dead and consumers are worried about their jobs. So this dive in revenues for Whirlpool Corp. (WHR) two years ago was hardly surprising.
What’s unexpected is the recovery at the end of that line, an encouraging rebound that’s repeated across key fundamentals for the company. In fact, management predicts record Whirlpool earnings this year.
The improvements of the past two years have been so strong that YCharts Pro now gives Whirlpool top marks on all basic fundamentals. And its shares, according to the charts, are undervalued.
Whirlpool achieved this quick turnaround by focusing attention at the height of the recession on two key factors: profit margins and cash management.
To improve profitability, the company cut costs considerably by making interchangeable the parts it uses in appliances in every country. Whirlpool manufactures appliances in 67 locations around the world, and about 50% of recent sales came from outside the U.S. Standardization was long overdue.
It also determined to build high-end new products, such home washing machines that hold three-times more clothes than ordinary units, despite the mood of austerity. New models haul in higher profits than standard models, and 2011 will be a big year for such roll-outs in North America.
Finally, the company recently implemented price increases in most of its major markets.
All of these efforts resulted in raising the profit margin from 1.95 in December 2009 to 3.39% at the end of last year. The company expects operating margins to improve further in the second half of this year.
Paying down Whirlpool's debt and generally improving cash management has greatly helped the company’s free cash flow, giving it a strong performance within the consumer goods sector.
Strong overseas sales are fueling the overall earnings growth, particularly in Asia and Brazil. The company expects a more modest rise in U.S. demand this year even though it is not forecasting a housing recovery.
The caveat for investors is rising raw materials costs that plague all manufacturers, which could send Whirlpool expenses upward. Whirlpool believes it has implemented price increases that will allow its profit margins to grow despite these higher costs. If they have underestimated the cost increases, or consumers’ willingness to cover them, profits won’t meet the company forecasts.
But today’s share price leaves room for some mistakes. Whirlpool shares currently trade at just over 10 times earnings, which seems only slightly undervalued.
But looking forward, Whirlpool's PE is just 6.5 based on the company’s 2011 earnings forecast. The company forecast would have to be off by 25% or so for the price today to look expensive.
Whirlpool did a remarkable job of selling home appliances at a time when more people were worried about losing their homes than furnishing new ones. With lower costs, eager overseas customers and less anxious ones at home, just think of what the company can do now.