Description

Whirlpool is a branded consumer appliance company that is currently selling at 10.7 times estimated 2020 EPS of $17.50 and only about 8 times projected 2022 EPS of about $23.00.

Whirlpool is a changed company from several years ago. It has substantially reduced its costs, integrated a large acquisition in Europe, and materially improved its free cash flow. It has become a strong company with many positive attributes including: favored brand names (including Whirlpool, Maytag, KitchenAid, and JennAir), particularly strong management (in our opinion), low cost production, efficiencies of scale as the largest appliance producer in the United States and in several other countries, and large free cash flows that likely will be used to build a particularly strong balance sheet and to repurchase shares.

About 60% of Whirlpool’s revenues and 75% of its normalized earnings come from North America, where the company is the largest producer of appliances by a sizable margin. In recent years, management has taken advantage of its scale to increase manufacturing efficiencies and to reduce overall costs. For example, Whirlpool produces many of its appliances in “mega”-sized plants, which produce 3-5 million appliances per year vs. 1-3 million appliances produced in “large” plants. Management has stated that, if you double the size of a plant, you lower manufacturing costs by about 3%. Partially due to its relentless focus on costs, Whirlpool has been able to increase its operating margins in North America from about 11% to about 14%.

Largely as a result of its reduced cost structure, Marc Blitzer (CEO) says that Whirlpool is a fundamentally different company than it was several years ago, with a cost structure that can provide strong earnings in normal years and good earnings in recession years.

The majority of Whirlpool’s sales are for the replacement of old appliances that have reached their useful lives. The typical replacement cycle for appliances is 8-12 years. The demand for appliances 10-14 years ago was low (caused by abnormally low demand for new houses and by the 2008-2009 recession). Thus, the replacement demand during the past few years had been cyclically weak, but now should start to improve.

The bottom line is that Whirlpool has an extremely well-positioned and valuable business in North America.

Europe accounts for roughly 20% of Whirlpool’s revenues and 10% of its earnings power. In 2016, Whirlpool’s previous CEO purchased Indesit, a mid-sized appliance manufacturer in Europe. The integration of Indesit into Whirlpool’s existing business in Europe ran into a bump. To achieve efficiencies of scale, Whirlpool redesigned its appliances in Europe so that Indesit models and Whirlpool models were built on the same platforms and used many of the same parts. Unfortunately, several suppliers were not able to provide Whirlpool with a sufficient number of newly designed parts – and Whirlpool fell behind meeting demand. As a result of production short-falls, many retailers allocated less floor space to Whirlpool’s models – and the company lost market share. The production problems have been solved, but it will take a while longer for Whirlpool to regain floor space and to regain most of its lost market share. After being in the red during the past few years, Whirlpool’s operations in Europe approximately broke even in 2020 (in spite of COVID). With continued gains in market share (which is happening), we project that operating profits in Europe will increase by about $200 million over the next few years, which would add about $2.50 to the company’s EPS.

Whirlpool also has sizable operations in South America (mainly Brazil), which accounts for close to 15% of revenues and 10% plus of normal earnings. While the economy in Brazil has been soft, Whirlpool is enjoying strong margins in the country due to its low cost structure and its very strong market position (its brands are highly regarded).

In Asia, Whirlpool owns 51% of Whirlpool China and 75% of Whirlpool India. The Chinese operation is not well positioned – and Whirlpool plans to sell the bulk of its holdings in China (there is a tender offer outstanding) and de-consolidate the subsidiary. On the other hand, Whirlpool India is a gem that has been growing rapidly and that has been enjoying double digit margins. The 25% of Whirlpool India that is not owned by Whirlpool is publicly owned and trades under the Bloomberg symbol WHIRL IN. With the shares currently trading at about 2200 rupees (or about $30.80), Whirlpool’s 95.15 million shares are worth about $2.9 billion, or $46 per Whirlpool share.

Using 2020 estimated EPS of $17.50 as a base, the continued rebound in Europe should add an estimated $2.50 per share to earnings over the next two years, bringing EPS to the $20.00 level before any growth, reduction in interest expense, or benefits from share repurchases. Given the expected growth in North America, Brazil, and India, I can make a case that 2022 earnings power could somewhat exceed $23.00, but to be conservative, I am using $23.00.

Over the past several years, the company has incurred relatively large restructuring expenses to reduce its cost structure in North America, Europe, and Brazil and to integrate Indesit into Whirlpool. Looking ahead, restructuring expenses should decline to a relatively small amount, and -- as a result -- free cash flows should increase sharply. Based on management’s guidance, Whirlpool’s free cash flows over the next few years should be about $1.2 billion per year. After dividends of about $300 million per year, about $900 million of cash will be available annually for debt reduction or repurchases. I note that if Whirlpool’s market cap remains at the present $12 billion and if $900 million were used in one year to repurchase shares, the company’s share count would decline by 7.5% (before a small amount of new issuances). I also note that Whirlpool’s revenues are at about the $20 billion level, so there is $1.60 of revenues behind each $1 of market value. It is highly unusual for a high quality consumer company’s shares to sell at less than 1 X revenues.

DISCLAIMER: This is intended for information purposes only (not investment advice) and should not be relied upon solely as a basis for investment. The author holds a position in the issuer and undertakes no obligation to update any future changes in the position or in the investment opinions expressed herein.

Catalyst

Improved operations and strong cash flow