Buy The Drop On Whirlpool

Summary

• Whirlpool has a strong track record of shareholder returns, and has seen material benefits in the current operating environment.
• It has a sizeable share buyback program, and should see continued operational strength for at least the remainder of this year.
• I also highlight the dividend, valuation, balance sheet, and other points worth considering.

Dilok Klaisataporn/iStock via Getty Images

Value investors know that it pays to be patient, as most stocks will give investors chances to buy at better price points. The recent market pullback has hit some names more than others, and for Whirlpool (NYSE:WHR), the pullback actually started in mid-May.

Perhaps WHR investors were being prescient with the recent market weakness? Whatever the reason, the decline in share price from $250 to $211 is material, and in this article, I examine what makes this a buying opportunity on this quality name, so let’s get started.

Why Whirlpool Is A Buy

Whirlpool is a leading kitchen and laundry appliance maker, with 78K employees and 57 manufacturing and research centers worldwide. It’s home to the familiar appliance brands of Whirlpool, KitchenAid, Maytag, Amana, JennAir, Consul, and Bauknecht. In the trailing 12 months, Whirlpool generated $20.5 billion in total revenue.

One of the advantages to having consolidated so many brands is the scale and efficiencies that come along with it. This also results in pricing power, especially in the domestic U.S. market for consumers that favor American brands. This is reflected in Whirlpool’s respectable EBIT margin, which at 11.1%, sits at a comfortable 370 bps above the 7.4% sector median. Higher margins lead to greater profitability, and this is a strong contributing factor to WHR’s robust 90% EPS growth over the past 5 years.

(Source: Seeking Alpha)

WHR has benefitted from stay-at-home environment and the robust housing market over the past 12 months, as consumers upgrade their home appliances and as new homeowners furnish their living quarters. This is demonstrated by WHR’s robust sales in Q1’21, with revenue growing by 24% YoY, to $5.4 billion. These results were by a strong performance in all Geos: North and Latin America, EMEA, and Asia, all of which posted double-digit growth ranging from 18% growth in LATAM to 43% growth in Asia.

It’s worth noting that WHR has felt some effects from raw material price inflation on resins and steel, with management forecasting a negative $1 billion impact this year. I’m not too concerned, however, as I see this as being a byproduct of strong global demand for consumer products. As such, WHR should be able to pass along these costs to consumers, and management expects for the raw material cost increases to peak in the third quarter.

Looking forward, I’m encouraged by management recently raising its guidance on both its top- and bottom-line figures for this year, with sales now expected to grow by 13% (up from 6% previously), free cash flow expected to be $1.25B (up from $1B) and EPS expected to land at $23.00, representing a 25% YoY increase.

I’m also encouraged by WHR’s efforts at boosting its manufacturing capabilities domestically in the U.S. with the announcement of a $15M investment into its factory in Tulsa, Oklahoma in late May. This is expected to create 150 new jobs, boosting its headcount at its Tulsa factory to over 2000 employees.

Balance Sheet, Dividends, and Valuation

Meanwhile, I see WHR as being a prudently managed company, with $2.5B of cash on the balance sheet, and a BBB investment grade credit rating from S&P. WHR also maintains a solid leverage profile, with a net debt to EBITDA ratio of 1.3x, which is in line with management’s target of sub-2.0x leverage, and is well below the 3.0x level that I prefer to see.

This lends support to WHR’s 2.6% dividend yield, with a very low payout ratio of 23.6%, a 5-year CAGR of 6.6% and 11 years of consecutive annual growth. I also see WHR as being a total return story, as the company has aggressively reduced its outstanding shares, with a 19% reduction in share count over the past 5 years. Management recently increased its share buyback program by $2B, bringing the total remaining authorization to $2.4B. I find this to be rather significant, as this represents 17% of WHR’s current equity market capitalization of $13.9 billion.

(Source: Seeking Alpha)

Turning to valuation, I see the recent drop in WHR’s share price as being a buying opportunity. That’s because consumer products companies should be able to raise prices in an inflationary environment. At the current price of $211, WHR is trading at a forward PE of 8.9. This implies that WHR has a no growth future, which I do not believe to be the case. Analysts currently have a $240 price target, implying a potential 14% gain, and as seen below, WHR’s blended PE of 10.1 sits below its normal PE of 11.4 over the past decade.

(Source: F.A.S.T. Graphs)

Lastly, CFRA has a Buy rating on WHR with a $270 price target, noting the following in its latest analyst report:

We see increased global demand for household appliances and raise our confidence in WHR accelerating sales momentum in 2021. We are positive on WHR’s outlook as EMEA and North America are benefiting from the work-at-home trend and the strong housing market. Asia and Latin America are beginning to grow faster.

WHR faces challenges with higher raw material costs and supply chain, but we think it can pass on these costs with higher prices on appliances. We see EBIT margins widening to 10% in 2021, or 20 bps higher than 2020’s strong margins with higher production and costs taken out of the business.

Of course, no investment is risk-free, and the following points are worth considering:

• A surge in raw material prices may impact WHR’s margins if its unable to pass along the costs to consumers.
• Another COVID surge may disrupt WHR’s supply chain.
• Wage inflation and labor shortages may harm WHR’s margins.
• Increased competition may erode WHR’s pricing power.

Investor Takeaway

Whirlpool has largely benefitted from the stay-at-home environment and from the robust housing market. This trend should continue for the foreseeable future as the economy continues to improve. I also see WHR benefitting from inflationary trends rather than being harmed by it. Meanwhile, WHR maintains a prudently managed balance sheet, and should be able to continue its strong track record of shareholder returns. As such, I see the recent drop in WHR’s price as presenting a buying opportunity.

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.