After you receive this Alert, we will initiate a 45-share
position in Whirlpool (WHR:NYSE), which will account
for 2% of the model portfolio. The stock was recently
trading at $152.22. Due to the market’s recent run-up, we
have decided to start with a position that is modestly below
our targeted 3% initial weighting. We plan to add to the
position on weakness.
Fundamental Approval and Analysis:
Whirlpool (WHR:NYSE) is a leading global appliance
manufacturer with an estimated 40% share of the domestic
market and growing market presences in Latin America, EMEA
(Europe, Middle East and Africa), and Asia. The company has
manufacturing operations in 11 countries and its major
brands include Whirlpool, Maytag, KitchenAid, Jenn-Air and
Amana. Laundry appliances account for approximately 30% of
sales. Refrigerator/freezers also make up nearly 30% of
sales, while cooking accounts for approximately 20% of sales
and other products make up the rest. The company is making a
push with its small appliances, which carry higher margins
at lower average selling prices. Whirlpool is expected to
launch a host of new products with cutting edge
technological innovations in the current quarter.
Whirlpool is well positioned amid a resurgence in
replacement demand, and some increased consumer confidence
is bumping up the discretionary demand for appliances.
Meanwhile, the company continues to expand its global
operations with two recently announced large acquisitions:
Indesit in Europe and Hefei Sanyo in China. Last, the stock
carries a nearly 2% dividend yield and the company recently
announced an additional $500 million share repurchase
authorization, which it can fund with its vast cash flows.
For 2014, management expects the North American market
(approximately 57% of sales in the second quarter and 75% of
operating profit) to see a 5% increase in demand, with
Europe (16% of sales) being flat to up 2%. Projections are
for Latin America (23% of sales) to be flat to down 3%
(Brazil is the company’s largest market and its economy and
political outlook are quite muddied) and Asia (5% of sales)
flat (India accounts for the bulk of sales). The company is
anticipating $12.00 to $12.50 in non-GAAP earnings per share
(EPS) and $600 million to $650 million in free cash flow for
Management has highlighted four drivers of demand for the
company’s goods: replacement sales typically account for 40%
to 50% of sales, discretionary demand drives 20% to 30% of
sales and new housing and existing housing sales each
account for 15% of annual demand.
On the domestic front, we continue to see robust year-over-
year growth in U.S. housing starts. Each one offers
Whirlpool a chance to sell a minimum of four appliances and
a host of smaller housewares. The last U.S. housing boom
occurred between 2004 and 2006, and the typical replacement
cycle is 10 years. This means a robust replacement cycle is
potentially upon us. Most important is that home prices
continue to accelerate, feeding a surge in remodeling and
replacement spending to record levels.
In 2006, Whirlpool acquired Maytag and increased industry
price rationalization. Recent reports indicate that
Electrolux is in talks to acquire GE Appliances, a move that
we view positively, as it would further bring further price
discipline to the industry.
Using a 14x multiple on 2015 consensus earnings of $13.75
(which we see as being conservative), we calculate that the
stock is worth $193 a share. We expect that strong secular
tailwinds will aid this stock’s ascent as management
restructures, revitalizes and grows its global presence,
which makes Whirlpool a clean investment.
Technical Approval and Analysis:
Appliance maker Whirlpool is quite the volatile name but it
may have righted itself recently. Note the nice cup-and-
handle formation -- the stock has pulled back to an area of
support. The indicators are flashing a Buy signal and the
recent relative strength is impressive. Resistance lies
overhead at $155 or so but a move up toward that has this
stock poised for much higher prices.
The stock is up about 30% from our cost-basis price, so we are taking this opportunity to right-size our position.
The company handily beat estimates and we remain bullish on this cash-rich, undervalued retail play.
Want more than one service? Sign up to one of our packaged services and take advantage of amazing savings!
Tweet to @aztecs99 or @bryan_ashenberg