Whirlpool (WHR) is a stock I have discussed quite a few times over the past 2 years. One of the reasons is the fact that the company's earnings reveal a lot about the impact from factors like commodity prices, consumer strength and global influences. My most recent quarter review was quite a few months ago. Back then, I discussed the negative influences from rising input prices and falling sales. In this article, I am going to update my previous article and tell you what I am looking for before I start buying this stock.
One of the key problems Whirlpool has had is slow sales growth and falling margins. In my most recent Whirlpool article, I discussed the company's focus on the most profitable segments while sustaining price/mix.
Whirlpool itself has a few points that should help to stabilize volumes while sustaining price/mix. These are mainly focused on the most profitable segments, while benefiting from the launch of new products.
Well, fourth quarter sales growth was down 1%. In other words, the fourth quarter marks the third consecutive quarter of negative sales growth after contracting by 4% in Q2 of 2018 and 2% in Q3 of 2018.
The good news is that price/mix improved in all regions, with US sales growth coming in at 5%. In the US, the company was able to deliver solid growth thanks to positive price/mix in what Whirlpool calls a 'soft industry'. Moreover, EBIT improved by 8% to $362 million with EBIT margins improving 0.4 points to 11.8%. This improvement is a good signal given that the company once again got hit by rising input inflation.
EMEA countries continue to be a huge drag with sales being down 10% after an 11% decline in the third quarter. EBIT declined from $8 million to -$15 million while EBIT margins fell by 1.8 points to -1.2%. The margin decline was the result from falling sales being hit by rising input inflation. In other words, that's what the worst case for Whirlpool looks like.
Latin America sales are no different. Total sales fell by 8% to $990 million while EBIT fell by 16% to $59 million. EBIT margins declined 0.6 points to 5.9%.
The good news is that Asia is joining the US in the fourth quarter with sales growth being up 4% at $372 million. EBIT however fell 18% to $8 million while EBIT margins declined 0.8 points. This time, we are seeing that currency adjusted sales are up 11% driven by a rising market share in India.
Total EBIT margins in the fourth quarter of 2017 were at 6.6%. This number has declined to 6.2% led by a 1.5 points decline due to rising raw material/tariff inflation and higher marketing and technology investments. Price/mix added 3.0 points which is exactly what I wanted to see. It's just unfortunate that these gains were more than offset by negative aspects like the ones I just mentioned.
The bigger picture shows the recent sales/margins trend a bit better. Note that all indicators are being displayed on a last twelve months basis. What we see is that sales growth has peaked at the start of 2015 while EBIT margins have declined from almost 8% to currently less than 6.5%. That's exactly what investors did not want to see and why the stock is trading the way it is.
Whirlpool is quite positive going into 2019 with expected net sales of $20.3 billion. This implies a sales growth rate of 3% compared to the full year of 2018. Margins are expected to rise by 0.4 points to the 6.5%-6.8% range.
This (expected) margin expansion is based on a strong expected price/mix and lower net costs excluding raw material/tariff inflation. Raw materials, marketing and technology expenses as well as currency headwinds continue to be an expected drag on margins.
And before I go any further, let me quickly mention that the company has plans to improve its EMEA business. Whirlpool is aiming to stabilize volumes while sustaining price/mix through new product launches and to refocus marketplace investments on high margin segments.
That said, there are signs that the company could run into some unexpected difficulties as the housing market (a driver of appliances) continues to show signs of weakness as I discussed in this article.
In addition to that, we are seeing signs that consumer sentiment is weakening as peak growth has turned into growth slowing.
Source: University of Michigan
All things considered, there is a strong bull case to buy Whirlpool if you think the company's own expectations are right. A margin turnaround would do wonders to a stock that is trading at roughly 8.4 times next year's earnings with a dividend yield of 3.3% and a stock price that has missed the entire post-2016 stock market upswing (severe underperformance).
The problem I see is that economic momentum is cooling down in the mid-term. This could make it difficult to achieve ambitious sales targets. That's why I am not yet buying the stock. I am waiting for the perfect bull case which would include bottoming economic sentiment. However, if you disagree with me and think the economy will continue without any signs of weakness, I think this might be an interesting stock for you.
I'll keep you updated!
Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.