Month: January 2018

Revenues were light at $5.7 (+1% yoy, ex-currency -1.6% yoy) vs $5.84B consensus and EPS was $4.10 vs $3.99 consensus. For the year, higher prices and cost controls somewhat offset rising raw materials costs, with volumes flat overall and down in some markets. Units overall were positive and price/mix was positive in the quarter but a drag for the full year. Positives for the quarter were strong EBIT margins in N. America. The headline number they reported was a loss because it includes a one-time non-cash charge of approximately $420m due to a write-down of deferred tax assets related to tax reform. There is potential for some upside in their numbers from tariffs, currency and lower tax rate, though FCF guidance seems aggressive.

Current Price: $183 Price Target: Under Review
Position Size: 1.7% TTM Performance: -2%

They are struggling with executing and the valuation is getting high; revisiting target price. Key takeaways from the quarter:

Constant currency growth was weak in all geographies:
• N. America – sales were down 0.8% on 4.8% unit growth; margins were up 60bps.
• EMEA – sales were down 5.6% on a -6.8% unit decline; they’re operating at a slight loss in this region.
• Latin America – sales were down 4.4% on 2% unit growth; margins were up 50bps.
• Asia – sales were down 8.3% on 1.4% unit growth; they’re operating at a slight loss in this region.
Potential benefit from tariffs and currency could be a source of upside:
• Neither of these factors were included in guidance.
• Management said the impact of tariffs is hard to assess especially given actions by Samsung and LG to stockpile inventory in the US ahead of the announcement.
• With 54% of sales outside the US, currency could be a tailwind to the 2-3% industry growth they are projecting in 2018.
Free Cash Flow is running behind expectations:
• A key part of the story is FCF margins improving to 5-6%. Historically they have been 2.5-3%.
• For 2017 they were initially expecting $1B of FCF on $700-750m of capex. They reported 2017 FCF of only $700m, which was really a bit less than that as they made some adjustments.
• They are again guiding for $1B in FCF this year which would be a ~5% FCF margin.
Valuation:
• While they are projecting $15/share in EPS for 2018, it’s only about $13/share in FCF (net income regularly outpaces FCF). So, the stock is trading at a 12x forward P/E and a 7% forward FCF yield, and a 4% yield on unadjusted 2017 FCF. That’s a lot of expectation built into a stock that seems to be overpromising and under-delivering.
• If they can hit organic growth and FCF targets, the stock is undervalued, however LT top line growth has been low (<1% 10 yr. CAGR including acquisitions) and their FCF projections would require a step function improvement.
• Reviewing the price target.
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 as emerging middle class affords a higher quality of life. WHR sales are correlated to existing home sales, which were up 1% in 2017. An improvement in household formation should accelerate new and existing home sales growth.

• Risk-adjusted return: WHR 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.

Whirlpool is up on news that the Trump administration is imposing a tariff on washing machines –N. America segment washers are roughly 14% of revenues. They report tomorrow after the close, so we’ll get more commentary on the impact then and on the call on Thursday.

• It’s a 20% tariff (this will decrease by 2 percentage points per year) on the first 1.2 million units and a 50% tariff on machines above that number (this will decrease by 5 percentage points per year) and will last for three years.
• Around 3.4 million units are imported annually
• The largest impact is on LG and Samsung which have roughly 33% combined share
• The impact of this will be offset by the construction of US based capacity by LG (in Tennessee) & Samsung (in S. Carolina) which is expected to start coming on line this year.
• Another mitigating factor is LG & Samsung may have shipped excess inventory in anticipation of this tariff.
• If WHR raises prices in response, assuming 80% incremental margins on a price increase, they could get $100m to $200m in incremental operating profit.