December 30, 2015 - 5:12pm EST by
2015 2016
Price: 149.00 EPS 12.14 14.39
Shares Out. (in M): 80 P/E 12 10
Market Cap (in $M): 12,000 P/FCF 0 0
Net Debt (in $M): 3,300 EBIT 0 0
TEV (in $M): 15,300 TEV/EBIT 0 0

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  • Consumer Goods
  • Appliances
  • Cyclical
  • M&A (Mergers & Acquisitions)
  • Industry Consolidation
  • two posts in one day


Appliances have historically been a fairly low margin, low multiple, cyclical business with not a ton of brand recognition outside of some of the very high-end brands.  This is an industry that is in transition as the larger suppliers are consolidating (WHR+Maytag+Indesit+Heifi Sanyo, ELUX+CTI+Somela+failed GE acq, CNA+Fagor, etc.) and despite a few years of better sales, we are still cyclically depressed from a volume standpoint across most geographies.  Additionally, WHR itself faced a number of very strong headwinds throughout 2015, not the least of which was Brazil.  Finally, the dissolution of the GE + ELUXB SS merger in early December has led to the most recent sell-off causing the stock to sit near 52-week lows.


Between cyclical tailwinds in some geographies, moderating headwinds in others, acquisition synergies, and other cost savings, I view WHR is setting up to grow earnings fairly strongly in 2016 and beyond.  Combine that with the lowest valuation in three years, WHR looks like it could have a fair amount of upside in a base case scenario with decent downside protection.


The appliance industry is still fairly fragmented globally, but in certain geographies where WHR is exposed, the industries are consolidating:

  • NA = WHR has 25-30% market share (#1) and ~50-60% market share between top three (WHR + ELUXB + GE) 
  • EU = WHR now has #1 share PF for Indesit acquisition with three major players holding a majority of the market share (WHR, Bosch-Siemens and ELUXB SS)
  • LA = WHR has 40% market share (#2) in Brazil effectively shares a duopoly country with ELUXB SS


Additionally the larger markets for WHR remain (or have become) cyclically depressed

  • NA = NA appliance demand began recovering in 2012, but WHR estimates a 4-5% demand CAGR through 2018 to return to the LT trend line for appliance demand  
  • EU = W. Europe has been trending around 2006 levels of demand for a few years but has recovered somewhat this year as the economy begins to recover somewhat 
  • LA = Brazilian demand is trending down significantly this year after a bad 2014 (down 20%+ from peak)


WHR and ELUXB SS have good charts in their presentations outlining current and historical appliance demand:



Going forward we don’t expect any real surprises from a demand perspective relative to current expectations and the thesis isn’t predicated on that.

  • NA market demand to be up 4-5%   
    • WHR has been losing some market share, so may underperform, but as currencies stabilize, they should trend closer to in-line  
    • Recent AHAM data for Q4 seems to be averaging around this, though November slowed markedly (+2.4%) due to over-inventorying in a strong October (+9.9%)  
  • EMEA market demand to remain LSD growth as the Western European economies continue to recover and Eastern European economies lap very easy comps
  • LA market demand to stabilize after a year of units trending down 20%  
    • Demand may still be down 10%, but this will be less of an issue as the company has taken corrective issues on costs and the business is now a smaller percentage of the total  
  • China market demand to stabilize after trending down this year  
    • Because of the increased distribution (distribution increased by 10x) acquired through their Heifi Sanyo acquisition, WHR is likely to continue to outperform the market significantly here

Instead the thesis is predicated on what I think to be a fairly easy bridge to better 2016 earnings combined with low valuation and negative sentiment caused by a disastrous 2015 driven by EM weakness.  Beyond 2016, I believe market growth/recovery, execution and potentially additional consolidation will continue to drive earnings higher.  Earnings bridge:


·         2015 EPS = $12-12.50

o   I don’t see much downside here and potentially see some upside as Q4 is generally the seasonally strongest quarter and they are experiencing a full quarter of their new, well-received Kitchenaid products

·         Potential tailwinds:

o   Indesit synergies = $170M incremental anticipated in 2016 = $1.60 in EPS

§  The company has promised $350M in synergies from this transaction, bringing subscale European margins of LSD closer to company average in HSD

§  Thus far the company has exceeded its 2015 synergy targets and has reiterated its 2016 synergy targets, suggesting that there may be upside

o   Brazil stabilization = 300-400 bps of margin expansion = 60-80c in EPS

§  As the currency has devalued and demand has consistently gotten worse throughout 2015, the company has cut 15% of their workforce and they continue to watch costs pending the situation

§  Provided demand and the currency don’t get significantly worse from here, I have confidence that the company’s corrective actions should drive upwards of 400 bps of cost savings

§  We should see this start to flow through in Q4 (so 3+ Qs in 2016)

§  Note, the BRL has stopped deteriorating quite so significantly

o   NA = remains a growing market, but they’ve lagged due to promotional activity driven by FX advantages of Korean mfrs, but this FX advantage has deteriorated some since entering Q4…I believe the market likely stays strong along with housing into 2016 and grows 4-5% per management’s believe a few cases:

§  Slight growth for WHR (~300-400 bps underperformance) and company maintains margins

·         Minimal impact on EPS

§  2-3% growth for WHR and no further margin expansion

·         ~30c to EPS

§  4-5%+ growth for WHR and no further margin expansion

·         60c+ to EPS

o   Cost tailwind from lower steel prices flowing through = $1-2 in EPS

§  This is expected to be roughly $1 in benefit this year and should be more pronounced next year due to timing and recent further steel price weakness

o   Other potential tailwinds (from most to least likely)

§  NA realizes some operating leverage outside of raw material cost improvement

§  EU demand continues to improve

§  China demand stabilizes and WHR outperforms due to sizable distribution advantages gained from Heifi Sanyo acquisition

§  LA demand bounces off of the bottom on economic stabilization

·         In aggregate, we’re looking at:

o   Indesit = $1.60

o   Brazil cost outs = 60-80c

o   NA = 0-60c

o   Steel tailwind = $1-2

o   Total = $3.2-$5

 in incremental 2016 EPS tailwinds.

·         Potential Headwinds:

o   FX – this will likely be a $4 drag on EPS in 2015

§  At current rates, there is likely another $1.50 drag on EPS in 2016 if rates stabilize here

o   LA demand actually gets worse…most of this is centralized in Brazil, which is now <10% of sales

§  If Brazil demand is down by 20% again @ $2B of sales = $400M @ 10-15% decremental = 40-60c of drag on EPS

o   Other potential headwinds:

§  Increased comp expense

·         I assume this is offset by assuming no operating leverage above

o   Total = $1.90-2.10

·         Net = $1.10-$3.10

o   Top-end assumes LA demand stabilizes


·         Cases:

o   Low = $12 in FY15 EPS (low-end, don’t think there’s much risk here) + $1.10 = $13.10

o   Base = $12.25 in FY15 EPS (mid-point) + $2.10 = $14.35

o   Upside = $12.50 (top-end) + $3.10 = $15.60

§  Street is currently at $14.39

Hence, I see the risk/reward as follows:

  • Risk = 10x low-end EPS of $13.10 = $131 (12% downside)  
  • Reward = 13x base case EPS of $14.35 = $187 (25% upside)   
  • Big Reward = 15x upside case EPS of $15.60 = $235 (60% upside)



  • Q4 earnings beat on strong seasonality and low expectations   
    • The stock tends to trade around AHAM data, which hopefully continues to look good based on seasonality and new products as covered above  
  • 2016 guidance is at least in-line with the Street



  • Fed continues to raise rates, causing a stall in housing and appliance demand  
    • Not a macro guy, but the NA market is still cyclically depressed and rate increases are promised to be gradual…I believe this impact is anticipated in my no growth case in NA  
  • Euro and other currencies continue to deteriorate  
    • Somewhat linked with the first risk, but it is unlikely to be as pronounced as this year  
    • Some stability is showing up despite the first increase in rates  
  • China faces a significant consumer downturn  
    • WHR has company-specific growth engines, but this could definitely impact this part of the business
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


  • Q4 earnings beat on strong seasonality and low expectations   
    • The stock tends to trade around AHAM data, which hopefully continues to look good based on seasonality and new products as covered above  
  • 2016 guidance is at least in-line with the Street
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