Whirlpool (WHR) Q3 2017 results

Whirlpool (WHR) reported Q3 2017 earnings of $3.83 below street expectations of $3.94.  Margins fell mainly due to raw material inflation and product mix.  For 2017, the company has lowered guidance 7% to 13.60-13.90.  Positives for the quarter were solid performance in N. America, strong share buybacks and announcement of cost and price initiatives.  WHR is trading down 10% today.

 

Current Price:  $164              Price Target: $207

Position Size: 2%                    TTM Performance: -3.8%

 

Thesis Intact. Key takeaways from the quarter:

 

  1. Results
    1. N America sales +5% to $3.0b in Q3 driven by better than expected volumes but pricing/mix constrained profit. Op margins fell -0.4pts
    2. EMEA sales were down 4% yoy. Raw material costs hurt op margins which fell from 3.7% to 0.8%. Demand weakness in UK and weakness in British Pound were a drag on results
    3. Results in Latin America were better: sales up 6% to $849m and op margins rose to 6.3%.
    4. Asia remains a challenge: sales up 5% to $357m and op margin fell 4.3pts to 0.6%

 

  1. WHR remains attractively valued on a P/E basis
    1. Valuation
      1. WHR’s forward P/E multiple has traded between 10 and 13 over the past several years. WHR is back to 11x forward earnings today which we view as inexpensive for a cyclical
      2. Valuation very sensitive to EBITDA margin
    2. WHR is supported by a ~4.6% real yield and growing (2.6% dividend yield + 2% buyback)
    3. Free cash flow guidance of $900m

 

The Thesis on WHR:

  • Industry Leader: World’s leading manufacturer and low cost provider of major home appliances (founded 1911): 15% global market share & 35% US market share
  • Brand Value: One of the world’s most valuable brands with a portfolio that includes several $1B brands: Whirlpool, Maytag, KitchenAid, Jenn-Air
  • Growth opportunity: Significant international growth opportunity with emerging markets moving up to 1/3 of sales (#1 & #2 market position in Latin America and India) as emerging middle class affords a higher quality of life. US housing market also closer to bottom than top and majority of WHR sales are from replacement demand
  • Risk-adjusted return: WHR increased the dividend 20% (2% yield) and has paid a dividend every year since 1972. Dividends plus EPS growth provide attractive total return opportunity
  • Predictability/Consistency: Strong returns through the economic cycle speak to low cost leadership and brand strength
  • Attractive valuation: (7% normalized free cash flow yield, 2% dividend) and solid balance sheet (10% net debt/mkt cap)