Is Whirlpool a value stock that fights inflation?
Ochicken Tourbillon (NYSE: WHR) announced its predictions for the new year in January, it made a compelling case for investors. Management said that while sales of home appliances have increased during the pandemic, greater use of these devices while employees work from home will create a strong replacement cycle over the next few years.
The company said it expects annual earnings per share (EPS) of $27 to $29. Additionally, he guided organic revenue growth of 5% to 6% for the year. Whirlpool’s stock is down 27% this year as of Thursday’s close, likely partly on inflation fears. But the company’s forecast assumes that inflation will persist. To offset the higher costs, Whirlpool will increase prices and introduce new products to market.
Whirlpool’s stock is trading around its lowest forward price-to-earnings (P/E) ratio in 10 years, barring the pandemic sell-off in 2020. If the company can meet its 2022 guidance, the action could be a godsend.
Fighting inflation and beyond
Management believes that inflation will erode its operating margin 5 percentage points this year. At the same time, the company says it can add 6 percentage points by raising prices and launching new products.
Can Whirlpool raise prices and stay competitive? Its portfolio contains recognizable names like KitchenAid, Maytag and Amana, in addition to its eponymous brand. When a refrigerator or dishwasher breaks down, it’s a minor household emergency. Some people may take the time to seek out a discounted replacement, but the assurance of a trusted brand counts a lot when you’re facing a long time without a fridge, or worse… washing dishes by hand! Even if it means paying a little extra.
On top of that, work-from-home trends have led to increased use of devices. Whirlpool believes there will be a strong replacement cycle over the next few years. During the company’s fourth quarter earnings call in January, CEO Marc Bitzer said, “We’ve seen oven and connected device usage increase by more than 150% from the pre- COVID, and clothes washers have increased by about 50%. This ultimately leads to significantly increased replacement rates in the future.”
Approximately 55% of Whirlpool’s sales are replacement sales. Any extension or permanent work-from-home environment could be a boon to Whirlpool’s replacement cycle.
The remaining portion of sales goes to newly built homes and discretionary customers. The National Association of Realtors expects housing starts to increase in 2022 – another potential catalyst for Whirlpool.
Whirlpool has also embraced digital trends. The company offers connected devices such as voice control, food recognition and automatic laundry detergent replenishment. Plus, as more customers turn to e-commerce, Whirlpool is offering delivery, installation, and transportation services.
What could go wrong?
Inflation remains a problem for many companies, including Whirlpool. Although Whirlpool may have raised prices to combat rising costs, price increases may be more difficult to implement if inflation persists.
Interest rates are another issue for Whirlpool. Often, customers finance purchases of big-ticket items like appliances with credit. The Federal Reserve has announced several interest rate hikes this year, increasing financing costs and making large purchases harder to swallow for customers buying on credit.
A quick review of Whirlpool’s financials shows that sales have declined every year from 2018 to 2020. But keep in mind that Whirlpool does business all over the world and its results are often subject to currency fluctuations. Adjusted for that, sales actually grew 2.5% and 1.2% in 2018 and 2019, respectively. In 2020, sales were marred by COVID. Although sales have recovered over the past year and a half – with sales growing 13% in 2021 – currency issues may persist.
Finally, you may be concerned that the advice is too optimistic. Guidelines were released on January 27 and management may not have had time to fully digest the impact of the Omicron variant. The results for the first quarter of 2022 will be published on April 26. Stay tuned.
what are you paying for?
Based on the midpoint of Whirlpool’s 2022 EPS forecast, the stock’s forward price-to-earnings ratio is around 6.1 at recent prices. That sounds cheap for an established company with strong cash flow and legitimate growth prospects, and as I said above, that’s a rare low for Whirlpool.
In the short term, the market may continue to be spooked by inflation and rising interest rates and negatively affect the stock. In the long term, these problems should lessen. In the meantime, Whirlpool believes it redeem $1 billion worth of stock in 2022. That’s on top of a dividend yield above 4%.
Long-term investors willing to take short-term risk may find value in Whirlpool shares.
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