Whirlpool Corp.
/ (WHR-NYSE)/ Equity Research / WHR | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 02/24/2012
Current Price (02/23/12) / $70.90
Target Price / $74.00
SUMMARY
Whirlpool is prone to global market and foreign exchange risks as nearly half of its operations are international. Further, high customer concentration and rising steel prices are major threats to the company. In the fourth quarter of 2011, the company’s profits were significantlylower than the Zacks Consensus Estimate of $1.93 per share. However, Whirlpool has an unquestionable brand value, which will certainly facilitate its market penetration and expansionary plans. The company is also focusing on research and development in order to upgrade its products as per the changing customer preferences. Based on the above conditions, we have upgraded the recommendation on the stock to Neutral from Underperform and set a target price of $74.00./ Equity Research / WHR | Page 1
SUMMARY DATA
52-Week High / $88.6552-Week Low / $45.37
One-Year Return (%) / -9.31
Beta / 1.88
Average Daily Volume (sh) / 2,805,266
Shares Outstanding (mil) / 76
Market Capitalization ($mil) / $5,420
Short Interest Ratio (days) / 4.21
Institutional Ownership (%) / 83
Insider Ownership (%) / 0
Annual Cash Dividend / $2.00
Dividend Yield (%) / 2.82
5-Yr. Historical Growth Rates
Sales (%) / -1.2
Earnings Per Share (%) / 6.3
Dividend (%) / 2.3
P/E using TTM EPS / 9.4
P/E using 2012 Estimate / 11.9
P/E using 2013 Estimate / 10.7
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Value
Industry / Appliance-Hshld
Zacks Industry Rank * / 244 out of 267
OVERVIEW
Benton Harbor, Michigan-based Whirlpool Corporation was incorporated in 1955 and is one of the largest manufacturers of home appliances in the world. The company’s portfolio of products can be broadly categorized into laundry appliances (30% of total revenue in 2010), refrigerators and freezers (31%), cooking appliances (16%), and other small household appliances including dishwasher and mixers (23%). Its brand names include Whirlpool, Maytag, KitchenAid, Roper, Jenn-Air, Amana, Brastemp, Consul and Bauknecht.
Whirlpool has 67 manufacturing and technology research centers around the world. The company conducts its business through 4 reportable segments, which are based on geography. They are North America (53% of total revenue in 2011), Europe (17%), Latin America (27%) and Asia (3%).
REASONS TO BUY
Whirlpool is considered the largest home-appliances manufacturer in the world, leaving behind Electrolux, LG, Samsung, Bosch-Siemens and GE. Considering the market for washers, dryers, refrigerators, freezers, dishwashers, ranges and compactors combined, the company is ranked No. 1 in North America, No.1 in Latin America, No.2 in India and No.3 in Europe. Whirlpool is well-equipped to hold its leadership position in the near term through its expansion strategies.
Whirlpool is steadily gaining business momentum after the economic downturn. Its demand trends recovered in the U.S. as well as in Europe. Whirlpool comprises 41.5% of U.S. appliance sales while LG and Samsung have only 8.7% and less than 1%, respectively. The company is also determined to fully capitalize on the growing opportunities in the emerging economies, mainly Latin America (especially Brazil) and throughout Asia.
Whirlpool focuses on research and development with an objective to upgrade the existing product line and introduce new and innovative products. The company has 67 manufacturing and technology research centers across the globe. Its technology centers are located in Beijing, Shanghai, Shunde and Shenzhen.
REASONS TO SELL
About 50%-55% of Whirlpool’s revenues are obtained from international operations. As a result, the company’s financial performance will be vulnerable to risks in the global markets. The risks include foreign currency exchange rate fluctuations, changes in foreign country regulatory requirements, imposition of foreign tariffs and other trade barriers, government price controls, as well as political, legal and economic instability.
Whirlpool’s customer concentration is high. The company’s large trade customers include Sears, Lowe’s, Home Depot, Casas Bahia, Best Buy and Ikea, which have significant leverage as buyers. As most of Whirlpool’s products are not sold through long-term contracts to these customers, sales volume undergoes frequent adjustments, which can impact the company’s operations. Furthermore, these customers command the purchase price due to their considerable share in revenue. This can affect the company’s margins.
Rising material costs (mainly the price of steel) have forced Whirlpool to raise the prices of its products. This attempt is expected to have a negative impact on the company’s market share provided some of its major competitors from Korea like LG Electronics and Samsung have retained their existing prices.
Whirlpool’s liquidity position has deteriorated. The company’s operating cash flow more than halved to $530 million in 2011 from $1.1 billion in 2010 due to lower profit and declines in deferred taxes and payable (net) and accrued pension.
RECENT NEWS
Whirlpool Misses, Profits Dip – February 1, 2012
Whirlpool Corporation revealed a profit of $205 million or $2.62 per share for the fourth quarter of 2011 compared with $171 million or $2.19 per share in the same period last year. However, excluding special items, profits decreased to $0.32 per share from $0.43 per share in the fourth quarter of 2010. It was significantly lower than the Zacks Consensus Estimate of $1.93 per share.
Revenues in the quarter fell marginally to $4.9 billion from $5.0 billion as improving price/mix was offset by unfavorable currency and lower industry demand. Revenues were slightly lower than the Zacks Consensus Estimate of $5.0 billion.
Operating profit (adjusted) inched up marginally to $128 million from $127 million in the fourth quarter of 2010. It was positively impacted by continued improvement in price mix and cost productivity.
For full year 2011, the company’s profits dipped to $7.54 per share compared with $7.98 per share in 2010. It was also significantly lower than the Zacks Consensus Estimate of $9.21 per share.
Sales in the year went up 2% to $18.7 billion, which was in line with the Zacks Consensus Estimate. Operating profit declined to $792 million compared with $1.0 billion in 2010, mainly driven by significantly higher material and oil-related costs.
For full year 2012, Whirlpool expects to report earnings per share of $5.00 to $5.50. However, excluding restructuring charges and Brazilian tax credits, the company anticipates reporting earnings per share of $6.50 to $7.00.
Regional Results
Sales in North America rose a meager 1% to $2.6 billion. Operating profit improved to $202 million from $53 million in the previous year. It was favorably affected by the implementation of previously announced price increases and improved product mix that more than offset lower industry volumes, higher material costs and the impact from lower production volumes. Whirlpool expects U.S. industry unit shipments to increase in the range of 0%–3% in 2012.
Sales in Europe, Middle East and Africa fell 8% to $848 million. The region had an operating loss of $32 million in the quarter compared with a profit of $29 million in the prior-year period. The decline in operating profit was attributable to the ongoing financial crisis Europe, which led to weak consumer demand across the euro zone, higher material costs, lower production to adjust to lower industry demand and unfavorable product price/mix. As a result, the company expects industry unit shipments to decrease in the range of 2%–5% in 2012.
Sales in Latin America dipped 5% to $1.3 billion. Operating profit decreased to $155 million compared with $193 million in the previous year quarter as favorable product price/mix was offset by lower monetization of tax credits, higher material costs, unfavorable currency and reduced production levels. However, the company expects appliance industry shipments in the region to increase in the range of 2%–5% for full-year 2012.
Sales in Asia decreased 2% to $200 million. Operating profit went down to $2 million from $4 million in the fourth quarter of 2010 as favorable product price/mix was offset by higher material costs and weak consumer demand in India. However, the company expects industry unit shipments in Asia to increase 2%–4% in 2012.
Financial Position
Whirlpool had cash and cash equivalents of $1.1 billion as of December 31 2011 compared with $1.4 billion as of December 31 2010. Long-term debt was flat at $2.5 billion as of December 31 2011 compared with the same as of December 31 2010.
The company generated cash flow of $530 million from operations in 2011, a decline from $1.1 billion in 2010 due to lower profit and declines in deferred taxes and payable (net) and accrued pension. Meanwhile, capital expenditures increased to $608 million from $593 million in 2010. For full-year 2012, Whirlpool expects to generate free cash flow between $100 million and $150 million.
VALUATION
Currently, shares of Whirlpool Corp. are trading at 11.9x our 2012 EPS estimate of $5.95. The company’s current trailing 12-month earnings multiple is 9.4, compared with the 11.1 average for the peer group and 14.3 for the S&P 500. Over the last five years, shares of Whirlpool Corp. have traded in a range of 4.0x to 18.1x trailing 12-month earnings. The stock is also trading at a premium to the peer group, based on forward earnings estimates. The current P/E, which is close to the mean of the historical range, is at a 20% premium to the peer group for 2012. Our long-term Neutral recommendation on the stock indicates that it will perform in-line with the overall market. Our $74.00 target price, 12.4x our 2012 EPS estimate, reflects this view.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of WHR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1035companies covered: Outperform- 8.3%, Neutral- 84.2%, Underperform – 6.5%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / WHR | Page 1