Sell Signal: Whirpool Could Cut Its Dividend

Oct.24.11 | About: Whirlpool Corporation (WHR)

Whirpool Corp (NYSE:WHR) manufactures and sells mostly white goods for consumers. It markets under a host of brand names, and sells to dealers, retailers, and builders.

WHR shares are currently trading around $57.50, and the mean 12 month price target from analysts researching the stock is $75 (30% upside potential). This stock is trading below its 50-day exponential moving average of $57.27 and near its 200-day exponential moving average of $70.05. The stock has seen a steep decline in price from July through September, as a worsening economic outlook depressed the share price and the broader market. The shares bounced off their 12-month low of $47.35 reached in September and, though re-testing this low again in October, the stock has since recovered some 25%. It would appear that this low has formed a level of support.

Earnings per share for the last 12 months are $3.29, and these are expected to reach $10.94 in the current fiscal year, and then $8.16 next fiscal year (ending Dec 2012). These numbers place the shares on a trailing price to earnings ratio of 17.44, and a forward multiple of 7.03. This trailing price to earnings ratio is higher than competitor Electrolux (OTCPK:ELUXY), whose multiple is 9.97. However, Electrolux’s forward price to earnings ratio is 10.10 in the sector.

For investors looking at dividend paying stocks, WHR’s payment of a dividend of $2.00 last year gives the stock a yield of 3.60%, and is covered 1.15 times by its earnings. The company has paid dividends since 1929.

Current operating margin at WHR is 5.03%, with a return on assets of 3.83% and a return on equity of 6.63%. The current revenue from WHR’s income statement is $18.69 billion, and last quarter’s revenue showed year on year growth of 4.30%. WHR has cash of $845 million, and a total of $2.52 billion in debt. The company’s debt/ equity ratio is 56.03. With operating cash flow of $674 million, this is very manageable.

Looking at the 12-month chart, shareholders in WHR have suffered a minor catastrophe in the past twelve months when compared to the relative performance of the S&P 500 Index. The stock reached its high of $92.28 early this calendar year, and has slid since. The story is the same in the shares of Electrolux. Consumers, desperate to hold on to cash in the face of an uncertain future, are shying away from making white goods purchases. With house building waning also, white goods manufacturers and sellers are being attacked on two fronts. Then if price cutting is factored in, the outlook really is rather gray.

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Whirlpool also has a large exposure in Europe, and the outlook there is even worse than at home. Sovereign debt is forcing countries to take austerity measures that are leading to massive job losses, and an economic situation that is overcast with black storm clouds.

While I would like to draw more attention to good news surrounding WHR, I really can’t find much save for the judgement in the suit against LG Electronics, which has been ordered to pay WHR’s costs in the recent court battle. LG has also been told to refrain from disparaging advertising against WHR in steam dryer advertising steam dryer advertising. That really is as good as it gets.

Though the fundamentals look fairly strong, with a worsening economic outlook further discouraging buying of white goods the best that can be said is that the shares are a long term buy, and will recover strongly when the economy finally turns around. However, in the meantime I see very little upside in holding the shares for an unknown date of economic recovery. Dividends may come under threat of being cut, and I think the share price will come back further and break through the low of $47.35 seen in September. SELL.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.