Ryan Fuhrmann, CFA
February 8, 2007
Whirlpool (NYSE: WHR) is seeing softness in its primary domestic markets because of the nationwide housing slump, but favorable prospects from a major acquisition and international growth avenues should overshadow any near-term worries at this home appliance giant.
Whirlpool traces its origins back to 1898, and it has undoubtedly handled drearier housing and economic conditions than it is seeing currently. In the short term, it sees tough conditions for the first half of 2007, but expects somewhat of a rebound during the second half. North America accounts for around 60% of total sales, so it will continue to drive the company’s fortunes, but the firm is counting on international sales to generate the bulk of top-line improvements.
For 2007, management expects North American and European unit shipments to decline 2%-3%. Globally, it is seeing strong growth in Brazil and expects 2007 shipment growth of 10%-12%. India is leading Asian growth, and the region is expected to grow 5%-10% for 2007.
Until domestic growth stabilizes, Whirlpool will count on cost-cutting from last year’s acquisition of arch-rival Maytag. Management expects to wring out hundreds of millions in “significant efficiencies” over the next couple of years, culminating in $400 million in projected savings in 2008. Restructuring charges and other costs will likely offset some of these savings, as investors saw during today’s reported fourth-quarter results, but Whirlpool solidified its position as one of the dominant appliance companies by taking out a key competitor.
Based on guidance for 2007, shares of Whirlpool are trading at less than 12 times earnings and a similar multiple of projected free cash flow. Throw in a 1.8% dividend yield and Maytag cost-cutting for another couple of years, and you have the potential for some upside in the shares, even after a recent run-up.
Whirlpool is using excess capital to repay debt taken on to acquire Maytag, and its pension and health-care plans were underfunded by more than $1 billion before it bought Maytag, so that number could be even higher today. I wouldn’t characterize these as major concerns, but any drains on funds that could be used to benefit shareholders are worth keeping tabs on.
Other concerns of mine include the fact that the appliance business is capital-intensive, eating up cash flow in high levels of capex to maintain manufacturing operations. The space is also very competitive, and it’s becoming more so as General Electric (NYSE: GE) and international firms such as Samsung and LG Electronics increasingly make and market appliances. All can be found at major retailers like Best Buy (NYSE: BBY), Home Depot (NYSE: HD), and Lowe’s (NYSE: LOW). And Sears (Nasdaq: SHLD) accounts for the highest percentage of total Whirlpool sales (16% as of 2005).
In other words, Whirlpool is very dependent on a few major domestic retailers, and its largest customer is focused on cost-cutting rather than store growth. Additionally, wide availability and low differentiation pervade the market, which is a good description of a commodity business where price becomes a major consideration and cuts into profit margins.
Fortunately, Whirlpool has proven adept at introducing appealing new products and controls a number of well-respected brands, namely Whirlpool, Kenmore, and KitchenAid, as well as Maytag, Jenn-Air, and Amana (acquired from Maytag). Overall, I believe a seasoned operating model, reasonable valuation, cost-cutting opportunities, and international growth prospects outweigh concerns about slow domestic growth and near-term housing woes.
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Fool contributor Ryan Fuhrmann is long shares of Home Depot, but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.