A reader sent an email recently asking my opinion on Whirlpool after providing a link to another author’s analysis of the company. I provided a short response on the company, but felt I wanted to provide a more in depth analysis that might help other readers gain better insight into a stock I had recently mentioned. In the current market environment of the past year many quality companies have traded down to attractive levels for a long-term value investor. This continues the trend I’ve found of late of witnessing many multinational corporations trading at attractive multiples of P/E, book value and NAV in the face of global uncertainty. Whirlpool in my opinion is one of these companies and one that I’ve been able to secure positions in and continue to like.
I’ll first disclose that I was fortunate to initiate a full position in this stock at $68/share during the steep declines we witnessed earlier this year; with the stock now representing 3% of my RSP. I still intend to publish a post highlighting the re-organization of my RSP during this year, but due to time I haven’t had a chance to summarize those activities yet.
It shouldn’t be surprising to close friends that I’ve followed WHR for a number of years after learning the importance of enduring value from Charles. I’ve studied their purchase of Maytag, taken detailed observations of operations and witnessed the struggles of many in the wake of the subprime mortgage crisis and continued pressure on the US consumer. But as I explained in my post last year on my Healthcare Portfolio, WHR holds immense potential for capturing consumers in an expanding middle class in developing countries around the world. While each investor has a different method for measuring growth, my own research shows that WHR has been growing (both organically & through acquisitions) at over 25% per year. Market share globally is substantial, international presence stellar and the fact the company trades so cheaply for the scale of their operations and earnings is not an opportunity I’m about to miss.
Whirlpool is the leading home appliance manufacturer in the world with total revenues of $19.4B, profit of $640M (2007) and employs over 73,000 people worldwide. The company has sold household appliances to North American consumers since 1950 when Nineteen Hundred Corporation was renamed under the Whirlpool name and sold their first top loading automatic washing machine. Over the years WHR added to its business through acquisitions of Seeger Refridgerator, RCA’s appliance division, International Harvester Corp, KitchenAid, Phillips’ appliance division, Roper, Bauknecht, Inglis and finally Maytag in 2006.
One of the key concentrations in my new RSP has been on companies with enduring value through brands, knowing their customers and possessing operations of material or significant worth. After studying the investing principles and mistakes of Warren Buffett and having learnt hands on from Charles I want companies whose end customers can use their five senses to interpret a product or service and become a consumer for life by creating sustainable life time value. I want predictable and growing revenues, profits and stable margins. I want consistent returns within an anticipated range and management who is competent and able to delivery on those expectations. While these RSP stocks are not labelled as core value like some in my Value Portfolio, I am willing to pay a small premium for their consistent performance, superior management and enduring value. With Whirlpool I get a specific focus on brands, innovation of products and global growth that are difficult to find on a similar scale. Their own corporate description of innovation carries the specific definition of needing to deliver new and different solutions to their customers, establishing a sustainable competitive advantage and creating shareholder value. If you’ve read my posts on brands, SCA and other Value Rules you will quickly identify that WHR has nearly everything I want as a shareholder.
A key focus in my analysis was when I realized that not only did their acquisition and integration of Maytag provide cost savings of $400M last year, but their management of cost increases ($600M in 2007) allowed them to sustain margins with relative ease. Increases to input costs have been a serious concern in the past few years for many manufacturers as raw materials demand has increased substantially, witnessed by WHR’s inputs having increased over $1.7B in the last three and a half years. For a company that requires base metals, metallic component parts, aluminium, zinc, nickel and steel; an investor can only imagine the headaches to profitability this might lead to if mismanaged inappropriately. Management at WHR has been able to offset these increased costs by improving productivity and cost-based price adjustments to their products with little destruction to demand in price conscious markets.
Management is key to this company’s successes as they continue to execute on strategic elements with skilled insight into understanding their diverse consumer needs in varying markets. Knowing your customer in today’s global economy is both difficult and essential for corporate viability and their creation of a powerful brand empire is their competitive advantage at this time.
Whirlpool: their flagship brand, has market penetration on every continent and recently entered into India with water purification products in 2007
Gladiator Garage Works: provides organizational products for storage solutions in and around the home. This brand focuses on the fact that 40% of US residents use their home garage for supplementary storage of items (other than their car).
The difficulty of any company with a number of brands in different geographic markets globally is supply chain management and over the last few years this has been a focal point of management and the driver for its ability to control costs as it expands its presence into new markets through ever increasing productivity targets. What they’ve been able to do is not only expand their current portfolio of products under each brand name, but create adjacent revenues through new product offerings that include accessories, supplementary products and their 1-2-3 system.
At WHR corporate growth goes hand-in-hand with brand growth and the company has been very accurate in forecasting their expectations within +/- 5% during recent years. The regional breakdown of revenues reported in their fiscal 2007 results is as follows: North America (60%), Europe (20%), Latin America (18%) and Asia (2%). While growth in North America is expected to decline by 3-5% in 2008 and Europe to remain static, both Asian & Latin American markets are expected to contribute 5-8% growth year-over-year. While the US consumer market has been heavily impacted by the credit crisis and mortgage related foreclosures, sustained growth will likely result from the company’s continued focus on emerging middle-class consumers around the world looking to heighten their quality of life with appliances of convenience.
If you imagine for a moment what it might be like without a refrigerator, oven, washing machine or dryer in varying climates you can get a fairly clear picture of the demand in future years for these products as real incomes improve for millions of families even at the most basic price-point for introductory products. This can be witnessed in the sales growth for last year which was as follows: North America (0.8%), Europe (12.1%), Latin America (20.9%) and Asia (21.8%). While I continue to trust management’s ability to accurately forecast revenue growth, my own perception is that their expectations are at the low end of a reasonable range for 2008 and likely to provide slightly more upside than down in the next 12-24 months even in the face of a continued slowing in the US consumer and economy. What I’ve been most impressed with through cost reductions has been the role of gross margins at WHR as they’ve continued to increase over a three year period in all markets except North America. With operating margins having increased steadily in Europe, Latin America & Asia over the past few years there is likely some room to compress and act as a buffer in any difficult economic environment. Brands in or entering these key markets are just beginning to initiate mass segment penetration outside of North America where products are already in mature phases. This leads me to believe that WHR is positioned well to take advantage of early adoption in new markets and sustain improvements as those markets mature. The company is increasing the advertising budget for each specific product segment/brand and attempting to isolate target markets individually with concentrated media such as print, internet and television campaigns. The announcement that WHR is creating a joint-venture with Hisense-Kelon to produce appliances for Chinese consumers benefits both companies and gives WHR some additional inroads into emerging markets. The strategic initiation of such an agreement also helps China to act as a regional hub for manufacturing, design and supply to adjacent markets.
Management has also done an excellent job of maintaining a high level of involvement by the company’s employees in improving operations, products and Whirlpool’s social footprint. Employees are encouraged to submit ideas for innovation, cost savings and evaluation of products and can see those suggestions taking effect in the products they help to design, manufacture or sell. This concentration on quality and empowerment has helped to create a distinct corporate culture in both North America and across the world and leads to some of the increases in productivity and high level of adoption by consumers. Not only do employees have WHR brands and products in their households, but also help to improve designs and aesthetics in an attempt to better meet consumer needs and expectations. Whirlpool has made a commitment to social responsibility through setting its own organizational GHG targets for global operations and is involved with the SmartWay Transport Partnership. They also sponsor a list of charities that include Habitat for Humanity, Cook for the Cure, Instituto Consulado da Mulher & Susan G. Komen for the Cure making them an excellent visible corporate citizen in all regional markets.
Whirlpool does face serious competition, threats and barriers in its domestic & global operations that I certainly don’t discount or take for granted. The US mortgage crisis and its impact on consumer spending will no doubt continue to have an effect as was seen in recent Q2 results from many North American corporations. While growth has stalled here and is expected to decline this year slightly, there is no expectation for massive losses from continuing operations and the North American segment is expected to remain profitable as their core business. This provides a centre of support for global operations and drives investment for continued innovation of products and technologies targeted for new markets.
Competition in the home appliance sector both domestically and globally has also increased in recent years. Although GE has publicly stated its intention to sell off its appliance division, there are still serious competitive threats from Electrolux, Kenmore, LG, Bosch Siemans, Samsung & Haier. Whirlpool has tackled these challenges by focusing on consumer needs, discontinuing non-core operations (floor care, vending machines & commercial/residential businesses) and driving growth through innovative product offerings. I like that they have not discounted their prices in an attempt to compete on price and margins as I’ve stated above have remained stable and/or increased.
The company has continued its involvement with an Enterprise Risk Management group, over seen by its Board of Directors, to identify, isolate and combat currency concerns in recent years from a weakening US dollar. This includes monitoring market trends, systematic risks and hedging exposure through currency contracts, options & swaps to minimize price risks.
From a performance perspective WHR has outperformed the S&P Household Appliance index by 15.75% over the past five years, but that doesn’t give an accurate sense of how badly the stock has lagged over the long-term in comparison to other US stalwarts. An investor can easily examine the 5-yr chart (or beyond) and simply walk away uninspired. Peering into the company’s fundamentals though does reveal some tantalizing observations:
On a three-year basis revenues have increased by 12.6%, EPS by 8.7% and cashflow from operations by 5.7%. Dividends have held steady at $1.72/share since 2003, but the company’s debt/total equity has dropped by 9% since 2005 even with the purchase and integration of Maytag. The company has paid down debt effectively with cashflow and has $97M remaining in their share repurchase plan after buying back $368M worth of shares in 2007. In my assessment all of this leaves adequate room in future years to grow the dividend substantially above its historical low-end range or for the company to pursue key acquisitions for continued global growth and operations. Goodwill stands at 12.5% of total assets, but a significant portion of that can be attributed to the Maytag purchase and the premium paid to secure it. In a 5-year period ROE has averaged above 26%, book value has increased 29.3% (including acquisitions) and operating profit margins have averaged 5.6%. The company currently trades around 8.5x 2009 earnings and looks very attractive in comparison to their 5-year average PE of 12.5 times.
In the event that WHR participates in a full or partial purchase of GE’s appliance division, I would expect the stock to trade lower (down to the $60 mark) with the market’s anticipation of the debt they would need to take onto their balance sheet. While cashflow has remained strong over the past few years, the increased cost of financing in this current credit environment would be substantially higher than their current lending obligations. I would anticipate instead that a foreign competitor (LG, Samsung, etc) would be willing to pay a much more significant premium for GE’s appliance division than WHR in anticipation of the opportunity to enter current markets where GE’s products are sold. As a shareholder of WHR I’m content with that possibility as I feel the company is well positioned for growth with or without the GE acquisition and the higher cost of debt and size of the purchase makes it almost a deterrent in a benefit/cost analysis.
In any event I remain confident that Whirlpool holds a substantial amount of enduring value for the decades to come and is well positioned for growth both domestically and abroad. Their management team is highly competent, manage corporate and personal resources effectively and execute operations while remaining focused on returning value to shareholders through various means. The stock in my opinion is one that a long-term investor could place into their portfolio, buy periodically and earn an attractive and consistent return over that time horizon. As I mentioned in a past post, I remain convinced that there are many corporations globally who are operating within Latin American markets have attractive growth and investing opportunities which are seriously discounted by equity investors. WHR compliments my holdings in ADRE, BNS & BBV for this specific exposure.