Let's start with the obvious: Business at Whirlpool is lousy. Demand has declined in concert with an escalation of costs. For investors who seek to buy assets at a discount, it doesn't get any better than this. A stock like Whirlpool gets priced as if demand will never come back and as if costs will never be corralled. It's nonsense, of course. The current cycle will end in the not-too-distant future, and when it does, the stock quote will dramatically improve.
For evidence of Whirlpool's undervaluation, look to the comparable business at General Electric (GE - Get Report). GE is trying to sell its appliance business, with $7.2 billion in sales, for $5 billion to $8 billion. A comparable range for Whirlpool amounts to $195 to $310 a share. Why is GE trying to sell its appliance business? In part, it's because GE can't keep up with Whirlpool. Whirlpool has a much better appliance business than does GE. Whirlpool is easily the No. 1 brand in the U.S. (GE is No. 2) and it's far out in front of GE internationally as well.
Whirlpool's undervaluation is also seen in its robust free cash flow. Even though the company is struggling at a cyclical nadir, free cash flow yield is still robust, at 10%.
Should you own Whirlpool stock for many years to come? Not necessarily. When operations rebound and analysts are once again lavishing praise and platitudes on the company, the stock price will be much higher. If price approximates value, it will be time to take profits. That's because the good times, like the bad times, won't last.This column was originally published on RealMoney on May 28, 2008 at 7:35 a.m. EDT. For more information about subscribing to RealMoney, please click here.