By Brian Sozzi
Oh, the curious case of appliance maker Whirlpool (WHR). Here we have a company that made itself an industry titan via its acquisition of Maytag and yet, the stock is trading on a P/E multiple that represents a 50% discount to the nine-year mean. In fact, as of today the stock is trading below net asset value, as intelligent investor Ben Graham would say. It's almost hard for me to fathom such disparities given the following characteristics to the Whirlpool investment thesis:
- High barrier to entry industry.
- Strong industry position in the U.S.
- Global business with an array of different brands.
- Much leaner (as in the number of facilities operated and parts used in producing an appliance) business now than five years ago.
- Debt has been reduced as a percentage of equity.
- The dividend yield noticeably above 10-year Treasuries.
The final nail in the coffin, at least for the near-term future, was Goldman Sachs slashing its rating Tuesday to hold from buy. I lowered my rating on the stock months ago, reasoning that very cautious commentary on demand and how the second quarter unfolded would make a cheap Whirlpool stock...cheaper. I do not think the moment is upon to jump aboard this ship that is, in the eyes of the market, spinning out of control. The domestic sales numbers will have to demonstrate improvement this year for the stock to work again, but given the trends in new home construction, reluctance by consumers to purchase major appliances (opting for an iPad instead of dishwasher), and the competitive pricing environment it's tough to state confidently share price appreciation is in the cards.
To answer the question contained in the title, I do not think Whirlpool is on track to close up shop. What has happened is that the market is very fixated on industry trends as opposed to the fundamental changes for the positive that management has orchestrated. In an odd way, the market may be saying a dividend cut is in the cards because demand conditions are so fragile, both in the U.S. and in Europe.
What the Market is Watching...
- Absence of pricing power amid consistent promotions at big box retailers.
- Elevated raw material costs.
- Housing double-dip is no good.
- Whirlpool's European exposure will haunt financials for some time to come.
- Brazilian tax credits will eventually run dry.