As competition swirls in the home-appliance market, some critics are growing agitated at what they call the Whirlpool ( WHR) spin machine.

The company got its real start and its name more than half a century ago supplying Sears & Roebuck with modern washing machines, complete with automatic spin cycles. Soonn after Whirlpool established itself as the dominant force in the most lucrative appliance market in the world.

Since then Whirlpool has put together a formidable record of success. Recently the Benton Harbor, Mich., appliance maker managed to top quarterly profit expectations even as some big competitors -- notably Maytag ( MYG) -- drew up short. And while Whirlpool joined its peers in scaling back full-year guidance, it didn't give voice to familiar industry concerns.

Rather, the company says its business is holding up quite well. Indeed, it seems to marvel that its rivals are having such a hard time, and continues to see opportunity where others see peril.

"We're hearing and reading a lot from various participants in the industry about a significant pricing decline," a Whirlpool executive confessed in a recent conference call with analysts. But Whirlpool had "record revenues in North America, with significantly higher profitability that our major U.S. competitors. ...

"That's really important in this kind of environment, where some of our competitors are reporting the opposite."

But to critics, Whirlpool's escape from industry pressures is downright inexplicable. These people believe the only real constant in America's cutthroat appliance market is Whirlpool's confidence that it will remain on top -- even as brash new competitors mount a new challenge to an industry increasingly threatened by price stagnation. These people see more than a little spin in Whirlpool's past financial reports, and an outlook for the future that doesn't wash at all.

Whirlpool shares ended last week at $53.37, down 31% from a year ago. The company didn't respond to questions on Friday.

Report Card

When most bulls look at Whirlpool, they see solid earnings and -- more important -- a nice, clean cash machine.

Raymond James analyst Sam Darkatsh, perhaps the most bullish of the lot, is no exception. So when Whirlpool's quarterly earnings and cash flow statement came under fire during a recent conference call, Darkatsh was understandably concerned.

"The implication from some of the analyst questions to management was that Q1 earnings benefited in an artificial fashion from an inventory build that was abnormal and above that of last year," Darkatsh said.

In the end, Darkatsh concluded that Whirlpool had fumbled questions about the dramatic rise in inventories on the company's latest cash flow statement. But he found reasons to trust the company anyway. He ultimately justified the inventory jump by saying that beginning inventories were too low so management simply stepped up its routine seasonal buildup to address the shortfall.

But Whirlpool bears were already criticizing the company's financial statements even before the latest eruption. Most notably, they believe that Whirlpool's reported cash flow and sustainable cash flow are two very different things. As evidence, they point out that the vast majority -- more than 80% -- of Whirlpool's 2002 cash flow actually came from deferred taxes instead of operations.

"Obviously, that is not sustainable cash flow," said one Wall Street critic. "They're going to have to pay their taxes eventually."

In the meantime, the critic believes Whirlpool will ultimately fall well short of its cash flow targets for 2003. Although the company recently trimmed its 2003 earnings guidance, dropping it from between $6.20 and $6.40 a share to between $5.90 and $6.10, it kept its crucial cash flow projections in place.

The company, which weathered its normal cash drain in the first quarter, expects to rebound and grow free cash flow by 21% to $350 million this year.

"They'll have to grow operating profits by 30% to 35% -- something that, historically, they have never done," one critic said.

Prudential analyst Nicholas Heymann, who parted with mainstream Whirlpool bulls long ago, shares much of that skepticism. Essentially, Heymann believes Whirlpool is aiming to ramp up its business at the very point when big challenges -- particularly competition and pricing pressures -- could start to knock the giant down. He recommends that clients sell their shares.

Three Sides

Of America's top three appliance sellers, only Whirlpool sounds truly confident right now.

Many people believe General Electric ( GE), Whirlpool's closest competitor, may soon wash its hands of the appliance business altogether. Certainly, G.E.'s appliance division has become a clear drag on a company that has scored nice stock premiums by delivering rapid growth. The division musters profit margins that are roughly one-third of the company's overall average. And volumes and prices, hurt by foreign competition, are only dropping.

One Whirlpool short-seller, who's bullish on public homebuilders, said G.E. is shaving prices just to keep business it already has.

"G.E. just won a bid from a top 10 homebuilder -- by cutting last year's prices by 17%," he said.

Whirlpool, which has insisted that it feels no real pricing pressures, came out on the losing end of that two-party bid, the short-seller added.

Meanwhile, Maytag is shifting its entire strategy in response to the changing environment. After 50 years of catering to the high-end market, the company is hoping to branch out by supplying Lowe's ( LOW) with a more affordable line of appliances. By straying from its original focus -- long shared by Whirlpool -- Maytag has stirred some nagging doubts about the high-end market Whirlpool continues to embrace.

"We're seeing this mix shift to lower-end products," one expert said. "But Whirlpool keeps denying this."

Even popular investment author Peter Cohan, who sees clear signs of strength at Whirlpool, admits that something could be amiss.

"Whirlpool is either using competitive strategy to defy the broad market trends," said Cohan, who has no position in the stock, "or it is somehow exaggerating its reported results to defy economic reality, although how this might be happening is unclear."

Whatever the story, Whirlpool's margins are clearly slipping. In the latest quarter, the company's North American profit margins tumbled from 11.9% to 10% despite a 5% jump in sales. Whirlpool blamed the slide almost entirely on external factors, particularly higher pension and healthcare costs for employees, but critics sniff signs of lingering trouble.

Quite simply, they see a difficult, new cycle that's about to take the entire industry -- Whirlpool included -- for an unprecedented spin.

Modern Chinese Secret

Four companies, led by Whirlpool, currently control all but a fraction of the North American appliance market.

So threats by a relative newcomer, mostly cranking out miniature fridges for American dorm and hotel rooms, may seem like part of a big pipe dream. But China-based Haier is no ordinary competitor.

Less than 20 years ago, Haier was a dying refrigerator maker whose employees regularly drank on the job and burned pieces of the factory just to stay warm. But under the leadership of CEO Zhang Ruimin, a former plant worker who has risen to become the most powerful business executive in China, Haier has blossomed into what China hopes will be its first global company.

The Communist manufacturer already ranks fifth -- behind Whirlpool, G.E., Maytag and Sweden's Electrolux -- for worldwide appliance sales. The company plans to move up two notches, displacing at least one American player and potentially reshuffling others, by sometime next year.

And as a government-run company, primarily concerned with creating jobs, it can use a painful weapon against its profit-driven peers.

"At this point, they don't care about margins," one industry expert said. "They just care about market share."

And Haier is clearly antsy to grow. The company already dominates its native appliance market, where Whirlpool is battling to expand by sending skeletal sales crews off to penetrate the tough provinces in the heart of China. Although Whirlpool has already found success in China's affluent coastal cities, its growth there has been no cake walk. Whirlpool's original joint-venture partner there is now remembered as a big money loser that, in 2001, became the first company to ever be delisted from the Chinese stock exchange where its shares traded. Breaking into inner China could prove even harder. Right now, Whirlpool sets new records in some cities just by selling a few dozen appliances a month.

In comparison, Haier's planned invasion of Whirlpool's home turf looks like an ambush. Haier aims to sell nearly 1 million full-size refrigerators to Americans annually -- more than quadrupling its current business here -- by the end of 2005. Already, it has grabbed valuable floor space at some giant retailers that are stealing market share from Sears, where Whirlpool got its start and continues to sell more than 20% of its appliances.

The story behind just one Haier freezer, carried by Lowe's, could make some competitors shiver with dread. The "dream" freezer went from a napkin sketch to a working appliance in just one day. It was mass-produced and for sale at Lowe's -- with Good Housekeeping's seal of approval -- less than a year later.

Still, Whirlpool remains the clear king of innovators. The company has made a name for itself by consistently delivering some of the industry's finest appliances -- and, in turn, commanding some of the industry's highest prices. But history has already shown that nothing lasts forever. After all, foreign brands like Sony and Toyota only got where they are by squashing some once-proud American names along the way.

"The same thing could happen to appliance manufacturers," one expert said. "In fact, it already is."

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