Description

Background

Whirlpool is a global player in major home appliances, with North America being it's largest and most profitable unit. In the US, WHR has ~15% market share in the AHAM T-6 appliance category where it has been losing market share to LG and Samsung since 2017 who began aggressively importing appliances and discounting them locally, while Sears, once the top retailer in appliances underwent major de-stocking amidst their bankruptcy. This has led to the de-rating for WHR and the rise in short interest in WHR, which sits at all-time highs, except for that brief period when LG/Samsung were most aggresively dumping into the US.

Thesis

Fast forward to today, there have been several developments that have led to a less challenging competitive environment, which include:

1) The US has placed import quotas on washers/dryers to prevent dumping of appliances into the US market. That quota sits at 1.2 million units per year but has also be modified beginning Feb 7, 2020 to be a quarter limit vs an annual limit, to avoid front loading imports ahead of the heavy spring selling season. 

2) While LG and Samsung have tried to ramp production facilities in the US, they are both lagging behind expectations (3M units / year nameplate vs 1.5M currently) 

3) Channel inventory is significantly lower vs 3 years ago post Sear's bankruptcy and Lowe's de-stocking strategy, which is in final innings.

4) New home growth is accelerating, which makes up about 10-20% of new appliance demand

At the idiosyncratic level, WHR, who just reported 4Q earnings and provided 2020 results, is also experiencing some positive tailwinds:

1) Margins are stabilizing and improving, especially in NAM as they continue their de-emphasis on SDA (small domestic appliances)

2) Steel inputs have been a major headwind since 2016 have reversed and are a major tailwind in 2020

3) WHR recently signed an exclusive deal with DR Horton to provide appliances for their new homes - at 60k homes annually and a 5-unit (washer, dryer, refrigerator, dishwasher, stove), it is a 1-1.5% tailwind to top-line.

4) WHR is launching several new product-lines in 2020 and channel feedback has been positive with possible channel fill-ins

In summary, the US competitive environment is stabilizing and there are several tailwinds to sales, between lower imports seasonally, production issues at LG/Samsung, a lower channel inventory and accelerating home starts. Meanwhile, WHR is executing well, launching new products and gaining margin benefits from several avenues.

LG/Samsung Competitive Dynamics vs Import Quotas

The changing of the import quotas in 2020 are an important aspect of the competitive dynamics between LG/Samsung and WHR. in 2019, LG and Samsung front loaded their quotas ahead of the spring buying season (imported 1M units by April 2019 of the 1.2M quota) but are no longer able to do so in 2020. With the amended import quotas, there is a possible channel shortfall of around 200-300k units (2-3% of total annual sales) that their domestic manufacturing capabilities are not able to keep up with, which presents possible market shre re-capture opportunities at WHR, who is also launching new products this year.

The catalyst for the thesis is to watch the upcoming President’s Day sales at the big box stores. Channel checks are not expecting significant discounting during the upcoming sales as a sign of demand strength and if there is no significant discounting / promotions from WHR, it underpins their confidence in being able to recapture market share without resorting to competitive pricing.

Financials

WHR recently guided to 2020 EPS ~2% above the street pre-release at the mid-point and I think there is room for WHR to raise expectations through 2020 and 2021.

WHR guided to flat growth in NAM but I think it is more likely that WHR can do closer to 2-3% growth with over 80% incremental margins. Their growth is underpinned by the previously mentioned DR Horton contract and there is the possibility of future contracts. Furthermore, with new product growth, I estimate that with channel load-ins, WHR could see an incremental 0.5-1.0% tailwinds to revenue. 

Lastly, Single Family home starts ended November and December in high single digits and expectations are for new home-starts to accelerate in the mid-to-high single digits in 2020. With 10-20% of new appliance demand coming from new-homes, that could add an additional 0.5-1.0% of top-line growth.

In other regions, notably Latam, EMEA and Asia, WHR has exited unprofitable businesses, experienced significant inventory de-stocking and has stabilized their margin profile. In 2020 and beyond, they will be lapping easy comps which implies additional upside to their 2020 growth forecasts as well, although the incremental margins are not as significant as in North America, closer to the 40-50% range.

Valuation

I expect WHR 2020 EPS to be $17.15 vs current consensus of $16.44. which implies a 2020 PE of 8.5x, with a historical valuation of 11-12x before the perfect storm of competition and cost inflation hit the business. Assuming a 11x multiple on 2020 EPS, I arrive at a price target of $190/sh (30% upside from here).

Catalyst

January to March washer import data

January to March AHAM T6 data

President's day price checks

Continued beat and raises to EPS in 2020.