Author: Sarah Kanwal

Visa 1Q18 Earnings Update

Visa reported a good quarter with revenues of $4.86B and EPS of $1.08, both better than expected (including a benefit from tax reform). Their key business drivers of payments volume, cross-border volume, and processed transactions were supported by a strong global macro environment, including a solid holiday season in the US and growing digital payment penetration. They posted purchase volume growth of 9.7%, with strong performance across all regions. Visa total payment volume was just over $2 trillion (up 12.4% yoy, 9.7% in constant currency). Client incentives have been rising and came in at $1.3B (21.4% of revenue). They gave a solid outlook on the global macro trends they are seeing, especially in Europe.

Thesis intact, highlights from the quarter:

Benefits from tax reform:

Their adj. EPS growth of 26% included a 900 basis point benefit from tax reform. Last quarter they gave initial FY18 guidance of “high single digits” revenue growth and “high end of mid-teens” EPS growth. They maintained their revenue guidance and raised their EPS guidance (mid to high 20% growth) primarily on the lower tax rate. Their tax rate will be down 600bps to 23%, which will add over $800m in earnings and $900m in FCF. As a result, they are increasing their buyback and dividend.　 In general, they said they plan on prioritizing long-term “sustainable” investments versus one-time actions.

Strong results continue across all regions:

 

  • Asia Pacific +7.5% – improved volumes from Australia and Taiwan.
  • Canada+11% – higher gas prices and increased spending in retail and telecom.
  • CEMEA +19.3% – driven by the Gulf countries of the Middle East.
  • Latin America +14% – particular strength in Argentina.
  • US +9.6%
    • US credit payment volume was $478bn (up 11.3% yoy) and US debit payment volume of $402bn (up 7.6% yoy). Volume growth driven by increases in consumer credit, holiday spending and accelerating e-commerce growth. Online grew 4X faster than offline.
    • Saw particular strength in movies, gaming, fitness, sporting goods, and recreational activities.
    • During the holiday season, e-commerce gained share, representing 30% of consumer U.S. holiday volume.
    • New co-branded offerings with Starbucks and Uber.

Digital shift is growth driver but will weigh on margins:

 

  • Electronic payments should be a big long term growth driver. Their operating margins have been steadily rising for years, now standing at about 60%, but this trajectory should flatten out as they invest behind digital initiatives like Visa Checkout and Token Service.

Valuation:

 

  • Valuation supported by buybacks and dividends. In Q1, they returned $2.2B to shareholders consisting of $1.7B in repurchases and $460m in dividends. They plan to return over $9B of the $10B in FCF they expect to produce in 2018.
  • Given high ROIC and secular growth opportunity, the stock is trading at a reasonable >4% FCF yield. Dividend yield is <1%.

Visa Thesis:

 

  • Visa is the number one credit and debit network worldwide – accounting for about half of all credit and roughly three fourths of all debit card transactions.
  • We are still in the earlier innings of the digitization of electronic payments. This is a secular tailwind supporting Visa’s growth as 1.) Electronic payments continue to replace cash 2.) Commerce moves online 3.) Consumer spending grows globally
  • Visa’s asset light “toll both” business model is characterized by recurring revenues, high incremental margins, low capital expenditures, and high free cash flow.
  • Visa’s recent acquisition of Visa Europe should be a nice tailwind over the next few years as the European market is in the earlier stages of electronic payment adoption and Visa is well positioned to gain market share and improve margins in the region.

 

Apple Q118 Earnings Update

Apple reported record revenue and earnings, but iPhone unit sales and Q2 guidance were both below expectations.　 Revenues were better than expected at $88.3B, up 13%. EPS was $3.89, up 16% and also better than expected. iPhone units were weaker than expected at 77.3m units down -1% (and below expectations for 80m units), but iPhone revenues were up 13% driven by a record iPhone ASP of $796, up $100 from the prior year driven by iPhone X. Wearables were up 70% and were the second biggest growth driver after the iPhone. They also saw record app store sales. Heading into the iPhone launches in the fall, many analysts were predicting an iPhone “super cycle.” Sentiment has shifted dramatically given recent expectations for weaker iPhone unit sales, causing the pullback since mid-January when shares hit an all-time high of $179.

Current Price: $160　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 Position size: 3.8%

Price Target: Under review　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 30%

Thesis is intact, key points:

  • 1Q18 was a week shorter than 1Q17. Looking at growth metrics on a per week basis the results look a bit better.
  • Average iPhone unit sales/week were up 6% in the quarter.
  • Total sales/week were up 21%.
  • Guidance was weak, but that was widely expected. There were numerous reports heading into the quarter suggesting iPhone unit sales have been below expectations.
  • International sales accounted for 65% of the quarter’s revenue and they saw double digit growth across all geographies.
  • Sales in China gained 11% to $18B.
  • Cash is $285B, $269 of which is outside the US. Net cash is $163B. They have a provisional tax payable of $38B for planned cash repatriation.

iPhones

 

  • iPhone revenue grew 13% to $61.56B; units declined 1%.
  • On the call Tim Cook said “iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November.”
  • With iPhone representing 62% of revenue, there are concerns that overall growth will slow. Unit growth is being impacted by a smartphone market that is maturing as penetration rises and the unbundling of phone and service contracts by carriers has led to a longer replacement cycle.
  • There are also concerns that replacement batteries sales for older models could further extend the replacement cycle.
  • While a lengthening replacement cycle may be a drag on unit sales, this will abate when the replacement cycle eventually stabilizes.

iPad

 

  • iPad revenue grew 6% to $5.9b.
  • Average sales/week were up 8%.
  • They released new models mid-year.
  • iPad now has 46% share of the US tablet market.

Mac

 

  • Mac sales fell 5% to $6.9B, units declined 5%.
  • Average sales/week were up 2%.
  • 60% of worldwide Mac sales are to first-time buyers or switchers.
  • Strong emerging markets performance with Mac sales up 13%.

Apple Watch

 

  • Fourth consecutive quarter at over 50% growth.
  • Total wearables were up 60%.
  • The wearables business is now approaching a Fortune 300 company.

Services

 

  • Services revenue was up 18% to $8.5 billion with record revenue on the App Store.
  • They now have 1.3 billion active devices which is fueling this growth.
  • ApplePay purchase volume tripled and is now accepted at more than half of all retail locations in the US.
  • HomePod launch should help drive Apple Music revenue.
  • Augmented Reality enabled apps (ARKit) gaining traction – they point to this as an important area going forward. “AR is going to revolutionize many of the experiences we have with mobile devices.”

By Geography:

 

  • Americas: +10%
  • Europe: +14%
  • Greater China: +11%
  • Japan: +26%
  • Rest of Asia: +17%

2Q Outlook below expectations:

 

  • Revenue between $60 billion and $62 billion (estimates were at $65B)
  • Gross margin between 38% and 38.5% (estimates were 39%)
  • Operating expenses between $7.6 billion and $7.7 billion other income/(expense) of $300 million
  • Analysts are expecting 2Q iPhone units of 59.4 million

Valuation:

 

  • Trading at over a 6% FCF yield the stock is inexpensive, especially for a company growing top line, with high FCF margins and high ROIC.
  • The current price implies little to no growth and declining FCF margins.
  • They regularly return close to 100% of FCF to shareholders.
  • Gross cash is $285B, net cash is $163B, ~$32/share. They plan to reduce net cash to zero and will update their capital allocation plans next quarter. Given that they are suggesting reducing their cash by $163B there could be a transformative acquisition on the horizon.

 

GOOGL Q417 Earnings Update

Alphabet reported strong revenue growth for Q4, but earnings were weighed down by lower mobile advertising margins and rising marketing expenses. Additionally, FCF margins were down as they invest heavily behind new areas of growth. Revenues for the quarter were $32.3B up 24%, which was far better than expected. Excluding a $10B tax expense on repatriation, they reported EPS of $9.70/share which was below expectations. Revenues were driven by strong growth in advertising.

Thesis intact, key takeaways:

The concern is that are making less money per click:

  • Paid clicks were up 43%, but cost per click was down 14% and traffic acquisition costs (TAC) were up 33%. That put TAC at 24% of revenue, up 200bps. So, basically for their primary business, pricing is down and input costs are up, which is not a trend anyone likes to see.
  • The mix shift towards lower margin mobile ads is what’s negatively impacting earnings.
  • The primary cost of advertising revenue is traffic acquisition costs (TAC) and mobile search and programmatic are their highest growth areas and they have the highest TAC.
  • The street is reacting very negatively to these metrics, but it’s not a surprise that mobile ads are the growth driver or that they are lower margin.

 

  • Management has previously indicated that they expect TAC to increase as a % of revenue and that they are more focused on profit dollar growth than margins.
  • Advertising growth is still very high, but as the mix increases, the lower economics of mobile become more visible.
  • An added concern is that Amazon is starting to compete in mobile advertising.
  • Rising content acquisition costs with YouTube and increased marketing spend to promote hardware also ate into margins.

While Alphabet is principally an advertising company, management is working hard to reduce their reliance on this business:

 

  • They are investing heavily behind their biggest bets for the future (artificial intelligence, YouTube, hardware and cloud) which is weighing on FCF margins.
  • On the call the CEO said they are “laying the foundation for the next decade as we pivot to an AI first company.”
  • They differentiate themselves with their AI competency and have spent billions trying to inject AI into all aspects of their business.
  • Their cloud business is progressing though they are still a distant 3rd in cloud market share behind MSFT and AMZN.
  • Cloud　is now a $1 billion/quarter ahead of where most analysts were estimating. AWS reported $5B in revenue for Q4.
  • Their CEO says their cloud business could eclipse their advertising business long-term.

Summary of results:

 Advertising – 84% of revenue, up 21% – mobile is ~47% of sales.

Other Revenue – 11% of revenue, up 38% – includes play store, cloud and hardware.

    • Hardware sales more than doubled in 2017 with strong holiday sales of home speakers and Pixel smartphones. This business carries a lower margin.
  • Other Bets (1% of revenue, up 49%):

 

  • This segment consistently runs at a loss, but losses were not as bad this quarter.
  • Revenues primarily generated by Nest, Fiber and Verily.
  • They paused fiber expansion in Q316, so capex from this segment was about $900m lower.
  • Nest had a strong holiday.
  • Waymo surpassed 4 million miles of real world driving and is the only company to have a fleet of driverless cars on public roads without anyone in the driver’s seat.

Strong across all regions:

 US revenues +21%

Other Americas +31%

EMEA +24%

APAC +30%

Valuation:

 FCF for the quarter was $6B and $24B for the year. This is a decline from 2017, and represents a 22% FCF margin, below their typical range of 24-25%.

  • Trading at a 3% FCF yield. This valuation relies on Alphabet continuing robust top line growth and maintaining their FCF margin.
  • $102B in cash, $140/share or 12.5% of their market cap.

Thesis on Alphabet:

 

  • Online advertising’s share of overall Ad budgets will continue to grow as:
    • People spend more time on the internet/mobile internet vs tv, radio, newspapers etc
    • Higher ROI (+ easier to measure) per marketing dollar spent online vs other ad mediums
  • They are the global leader in search.
  • Well positioned to benefit from increased smartphone penetration.
  • Flexible business model provides operating leverage with high returns (ROIC 50%) and huge free cash flow generation.

 

Microsoft Q218 Earnings Report – Cloud performance driving strong results

Microsoft reported Q218 revenues and earnings better than expected, excluding a one-time $13.8 billion charge on cash repatriation. Total revenues were up 12%, gross margin increased 12% and operating income was up 10%. Weaker US dollar benefited revenue by less than 1%. FCF was $5.3B, up 23%, of which $5.2B was returned to shareholders though dividends and buybacks. Strong cloud trends continue with commercial cloud revenue up 56%, reaching $5.3B (18% of revenue) and Azure revenue growth accelerating to +98% YoY. Commercial cloud drove about 60% of the revenue increase for the quarter. GM and operating margin outlook were increased as cloud margins improve. This is important to driving future earnings growth as cloud is lower margin and becomes a bigger piece of the pie.　 Geographically, U.S. and Western Europe performed best driven by commercial cloud sales. Overall they are seeing positive IT spending signals, a strengthening commercial PC market and growing demand for hybrid cloud.

Current Price: $94　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 Price Target: Under review

Position size: 4.4%　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 49%

Thesis intact, highlights from the quarter:

 

  • Productivity and Business Processes Segment (includes cloud-based applications like Office 365, Microsoft Dynamics and LinkedIn)
    • $9B in Q2 revenue (31% of total revenue), up 25%. LinkedIn growth accelerated.
    • LinkedIn added 4pts to top line growth and 4pts of gross margin growth.

 

  • Intelligent Cloud Segment (public, private, and hybrid cloud services, including Azure)
    • $7.8B in Q2 revenues (27% of total revenue), up 15%.
    • Gross margin increased 7bps to 55%.
    • Azure revenue growth accelerated to +98% YoY and is now at about a $6.8B annual run rate.
    • Azure margins materially improved.

 

    • More Personal Computing Segment (Windows OEM licensing, search advertising and devices like the Surface and Xbox)
      • $12.2B in Q2 revenue (42% of total revenue), up 2%; excluding phone, revenue grew 4%.
      • Stronger than anticipated commercial PC market; consumer PC market “stabilizing.”
      • Xbox was top selling gaming device over holiday.
      • Xbox moving from a hardware console platform to a subscription software platform with recurring revenues and higher incremental margins.
      • Gaming revenue grew 8% and is at a $9B run rate.
  • Commercial Cloud

 

    • This measure includes cloud revenues primarily from the first two segments – Office 365, Azure, Dynamics 365 and other cloud.
    • Annualized run rate is annualized revenue from the last month.
    • Current run rate is $21.2B, vs $20.4B in Q118 and $18.9B at FY17.

Outlook:

 

  • Expecting Q3 revenue of $25.6B.
  • Improved their full year guidance on gross margins and operating margins.
  • At current rates, Fx will add 2pts to Q3 rev.
  • Expecting a tax rate next year of 21%.
  • They didn’t specify what they would do with the repatriated cash.

Investment Thesis:

 

  • Industry Leader: Global monopoly in software that has a fast growing and underappreciated cloud business.
  • Product cycle tailwinds: Windows 10 and transition to Cloud (subscription revenues).
  • Huge improvements in operational efficiency in recent quarters providing a significant boost to margins which should continue to amplify bottom line growth.
  • Strong balance sheet ($142Bn gross cash) allows company to be opportunistic in current environment.
  • Return of Capital: High FCF generation and returning significant capital to shareholders via dividends and share repurchases.
  • Valuation is reasonable at a 4.6% FCF yield and a 1.7% dividend yield.

 

Booking Holdings Q4 Earnings Update

Priceline, which recently changed its name to Bookings Holdings, had a better than expected 4th quarter driven by strong room night growth. Revenue growth should continue to be robust driven by room night growth and offset slightly by declining ADR’s. They have a high-single-digit percent of the overall travel market with plenty of runway for growth as they continue to benefit from the secular tailwind of growing online travel penetration. Rising advertising costs continues to be a theme across the industry, but they are making progress on optimizing their marketing spend. Additionally, they look to add new growth channels though alternative accommodations (homes & apartments) and through booking travel experiences. The name change was to align with the leading brand Bookings.com which represents 89% of gross profit. Their portfolio also includes KAYAK, Agoda, Rentalcars.com and OpenTable.

Current Price: $2,061　　　　　　　　　　　　　　　　　　　　　 Price Target: $2,400

Position Size: 2.2%　　　　　　　　　　　　　　　　　　　　　　　　　　 TTM Performance: 20%

Thesis intact, highlights for the quarter:

  • Revenues were $2.8B, +17% constant currency vs consensus $2.7B.
  • Constant currency gross travel bookings were +14% for the quarter and 19% for the year.
  • Room nights grew 17% to 152 million room nights for the quarter.
  • For the year, room nights were up 21%, representing 116m incremental room nights.
  • Average daily rates (ADRs), were down about 1% and are expected to continue to be slightly negative.
  • Adjusted EBITDA was $1.1B, up 23% and above the top end of their $910m guidance.
  • Adj. earnings were $16.86, which excludes $1.3B of provisional net income tax expense related to tax reform – comprised of $1.6B in repatriation tax, partly offset by a $217m income tax benefit from revaluing their deferred tax liabilities.
  • 2017 FCF was $4.4 billion, up 18%, growing slightly faster than revenue.
  • International provided $11.1B of their $12.4B in gross profit.
  • They continue to invest in growing their supply base and marketing and are experimenting with offering in-destination experiences like museum tours.

They are working on optimizing their marketing spend:

 

  • Marketing spend is essentially their customer acquisition cost, it’s a major portion of their operating expense and has been rising quicker than revenue.
  • This is a sector wide phenomenon. Cost of performance advertising has been going up and the return on that advertising spend has been going down. Competitors are spending increasing amounts, causing BKNG to spend more to maintain brand recognition and grow traffic to their sites.
  • Trying to improve ROI on their ad spend by increasing their share of direct traffic. They say this initiative is still in the early stages.
  • This means shifting some ad dollars to brand advertising (like TV) vs 　performance marketing spend, which is mainly through search engines (primarily Google), meta-search and travel research services.
  • They’re also working to improve how they measure the effectiveness of their advertising.

They are responding to Airbnb by growing alternative booking options:

 

  • They are expanding their alternative booking options and offering them in search results alongside traditional hotels in an effort to compete with Airbnb and Expedia’s HomeAway.
  • They now have an inventory of 1.2 million homes, apartments etc., up 53% YoY.
  • This could be a meaningful part of their business longer term.

Valuation:

 

  • They continue to generate solid FCF and growing FCF margins.
  • Returning capital to shareholders via buybacks. They returned $1.8B in 2017 and $6B over the last 3 years. They recently increased their authorization by $8B, bringing the total authorization to $10B.
  • The stock is still undervalued, trading at close to a 4.5% FCF yield.
  • Stable margins going forward and mid-single digit growth, leads to a DCF valuation of about $2,400.

Thesis:

1. Priceline is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.

2. PCLN has several competitive advantages relative to Online Travel Agent (OTA) peers:

  • Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
  • They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
  • Strong position in China/South East Asia via Ctrip and Agoda

3. Priceline’s addressable market is growing driven by: 1.) Alternative accommodations 2.)

Increased penetration (growth of mobile/internet) 3.) Global growth of travel spend > GDP.

4. PCLN’s asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.

 

Crown Castle (CCI) Q417 Update

Fourth quarter results were within the outlook range provided last quarter. Revenue for 2017 was $4.4B, up 35% (organic revenue growth of 5.5%). Leading this growth was small-cell revenue which was up 25% and included some revenue from the Lightower acquisition. Full year AFFO was $1.6B or $4.29/share. Guidance for 2018 total site rental revenue was increased to $4.6B (+25% yoy), but AFFO guidance was maintained. The dividend increased 8% for 2017, and is now close to a 4% yield; 7-8% growth continues to be the target going forward. They improved their balance sheet. Over the course of 2017 they reduced their leverage ratio to 5.3x (down half a turn). And with recent bond offering they lowered their average interest rate, increased their average maturity profile and increased their portion of fixed rate debt to 90%.

Current Price: $110 TTM Return: 30%
Target Price: Under Review Position Size: 2%

Thesis intact, highlights on the quarter:
Secular growth trends on track:
• Q4 total site rental revenue up 29%; Q4 AFFO up 26%
o Tower site rental revenue up 2.5%
o Fiber site rental revenue up 90% (including acquisition)
• Increased demand for wireless data is primary driver and mobile data demand expected to double every 2 years. Carriers need capacity and CCI is a low cost solution and fast to market.
• New leasing activity is accelerating. Lease-up on the small cells are about 2x the rate they experienced on towers.
• Churn remains low at 1-2%.
Capital spending by carriers may improve:
• Big 4 carriers make up 90% of site rental revenue – AT&T, Sprint, T-Mobile and Verizon. Corporate tax reform may prompt them to increase infrastructure investments.
• AT&T may begin constructing their FirstNet emergency network which will be funded in part by the government.
Benefit of new fiber assets:
• Closed three acquisitions in 2017: FiberNet, Wilcon and Lightower, expanding their high capacity metro fiber assets.
• Lightower closed in Q4, two months ahead of schedule.
• Assets have capacity to support organic growth and high incremental margins.
• Return assumptions on these fiber asset acquisitions based on current applications, i.e. new technologies like 5G, IoT, augmented and virtual reality would be upside. These technologies all would rely on CCI infrastructure assets for higher speed and lower latency requirements.
• If 5G comes to fruition, as expected, there is a stair step increase in densification required.
• Attractive shared economic model in small cell business. Lowest cost and fastest time to market for their customers. Multiple ways to monetize fiber assets improves returns and lowers cost and value proposition to customers.
Valuation:
• Strong AFFO growth will drive the valuation (up 16% in 2017). They have a 10 year AFFO CAGR of 14%.
• High incremental margins means AFFO growth should outpace site rental revenue growth.
• Low maintenance capex (~2% of revenue) supports high AFFO margins.
• $2.2B in AFFO ($5.50/share) in 2018 is a yield of 5%. This is an attractive yield given the secular growth potential.
• Price target is under review.
The Thesis on Crown Castle:
1. CCI is well positioned to capitalize on secular mobile data demand growth and small
cell/urban opportunity.
2. Strong competitive position. Leading US tower company.
3. Toll booth business – offensive (secular growth) & defensive (4% dividend & contracted cash
flows) characteristics.
4. Revenues derived from long term contracts with price escalators and good visibility.

Whirlpool 4Q17 Update

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 Update

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.