Friday, December 7, 2012

Is Whirlpool a Good Way to Play a Housing Recovery

With the US housing market showing signs of picking up, Whirlpool (NYSE: WHR) is a company well worth a look. Not only has it restructured in a drive towards increasing productivity and margins, but cash flow has been improving of late as well. In other words, all its metrics are moving in the right direction and its end markets look favorable. So what does the future hold in store and what does the risk reward proposition look like right now?

Whirlpool Bringing it All Back Home

It’s been a good year for the company as productivity initiatives have resulted in over $200m in cost savings, much of which is reflected in the bottom line. Moreover, another $200m in capacity reductions and cost benefits are expected next year. This is good news for a company with small margins, like Whirlpool. The result has been a nice uptick in operating margins in Q3, as demonstrated.

Indeed, the focus this year has been on margin expansion rather than trying to chase volumes or market share. That said, Whirlpool claims to have taken market share at the higher end. The turnaround in its prospects is most dramatically seen when looking at how operating profits have changed in North America.

In a sense Whirlpool is becoming an Americas focused company and I think that is a good thing. It means its earnings prospects are more dictated by the US housing market, over which, management declared its optimism that the market was trending better.

Housing Market Stocks Reporting Good Growth

The housing market in the US is getting better with a host of companies have been confirming this recently. For example, Home Depot (NYSE: HD) recently talked about housing being a sweet spot in the economy and its margins and revenue growth are demonstrating that pricing power is coming back to housing focused stocks. Indeed, Whirlpool is participating in a pilot program with Home Depot.

As such, Whirlpool has been included in that group of companies that has benefitted from better investor sentiment towards US housing, alongside things like Pier 1 Imports (NYSE: PIR) or Williams-Sonoma (NYSE: WSM). Both companies gave good numbers recently with Pier 1 raising guidance and forecasting mid-digit same store sales growth. Meanwhile, Pier 1 is generating enough cash to be able to invest in its e-commerce initiatives designed to maintain its market share. Similarly, Williams-Sonoma reported comparable brand revenue growth of 7.4% with its e-commerce revenues recording a mid-teens increase. Further growth initiatives include international expansion and new brand launches.

Product innovation is key for both these companies, but the underlying point is that end demand is improving thanks a better housing market. Whirlpool did affirm this, but in case anyone thinks it is just a case of setting up a shop and watching the customers roll in, I would suggest taking  a look at the problems at Bed, Bath and Beyond (NASDAQ: BBBY). This company simply isn’t managing its costs well and margins are being squeezed while same store sales growth has been slowing. Clearly there needs to be some restructuring here, but the company seems more focused on integrating acquisitions.

Where Next For Whirlpool?

I like what the company is doing and the evaluation is attractive. Asia is not a big part of profits, European comparables will get better, and Whirlpool appears set for growth in North America. It trades on EV/EBITDA multiple of 6.4 and with adjustments for the Brazilian collection dispute, free cash flow generation was around $520m on trailing year basis.  In other words, it generated around 5.6% of its enterprise value (EV) in free cash.  With another $200m due in cost savings next year the case for value is compelling.

My first concern would be with Latin America where other companies have been talking about a slowdown in Brazil and my second is the potential loss of market share inherent in shifting the mix of products sold to higher margins. Whirlpool competes in highly competitive markets. If you are jejune about the Brazilian question than this stock could start to look attractive but I confess I’d probably prefer to monitor events for now and hope for a larger margin of safety in the stock before buying.

No comments:

Post a Comment