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Investors in home appliance manufacturer Whirlpool(NYSE: WHR)
have seen a near-90% rise in its share price over the last year, and
many of them must feel tempted to take some profits. But the company has
a number of positive things happening for it in 2013. And if it
continues to execute in moving towards hitting its long-term targets,
Whirlpool could have plenty of upside left.
Whirlpool upgrades guidance
In line with many other companies in the current reporting season,
Whirlpool reported that North American conditions were strengthening,
while Europe remained weak and Asia weakened somewhat. Indeed, a quick
look at its updated expectations for industry demand tells the tale:
Industry Demand Assumptions
Previous Outlook
Current Outlook
North America
2% to 3%
6% to 8%
Europe
flat
flat to -2%
Latin America
3% to 5%
1% to 3%
Asia
3% to 5%
flat
Source: Company presentations.
Eagle-eyed readers will note that only the forecast for North
American was raised, but the good news is that this is the key region
for the company. Whirlpool generates nearly 55% of its revenues from
North America, and a graph of its regional profits illustrates that its
importance:
Source: Company accounts.
With regard to revenue, North America makes up nearly 54.8%, with
Latin America contributing 25.3%, EMEA around 15.4%, and Asia with only
5.2%. For those of you worried about a potential slowdown in China’s
housing market, the good news is that Whirlpool is not particularly
exposed.
For this reason alone, the stock is more attractive than home-improvement toolmaker Stanley Black & Decker (NYSE: SWK). A large part ofStanley Black & Decker’s growth prospects
come from its strategic growth initiative. The plan involves aiming to
increase revenues by $350 million within emerging markets, and China
makes up a big part of its growth intentions. Although Stanley Black
& Decker has a similar exposure to Whirlpool in North America, the
market won’t waste any time in marking down the former if its growth prospects diminish in China.
The really good news for Whirlpool investors was that its overall
guidance was upgraded. Ongoing diluted EPS forecasts were raised to
$9.50-$10.00 from $9.25-$9.75 previously. Equally importantly, its
forecast for free cash flow was raised to $650 million-$700 million from
$600 million-$650 million. Some investors have worried about
Whirlpool's lack of cash flow generation in recent years, but given
ongoing margin expansion, the company looks set for strong growth in
free cash flow.
The three reasons why Whirlpool’s prospects will get better
The second reason is that the U.S. is approaching the 10-year
anniversary of the housing market boom. This is important, because the
large number of appliances bought at the top of the market will
increasingly need replacements.
Source: Association of Home Appliance Manufacturers.
Obviously, home-improvement stores like Home Depot(NYSE: HD) and Lowe’s will also be beneficiaries from these trends. Indeed, in a sign
that the cycle is turning, Home Depot is starting to see its
professional sales outpacing its consumer revenues. Moreover, the
segments of its sales that outperformed in the last quarter involved
things like kitchens, electrical, décor, lighting and hardware. These
trends are positive for Home Depot because they imply an increased
willingness among consumers to spend on discretionary items. Moreover,
they are the kinds of goods that Whirlpool sells.
The final reason is that the housing recovery is encouraging new
housing construction. This is good news for Whirlpool, because it will
spur sales growth 6-9 months down the line as new homeowners start to
purchase home appliances. In addition, this trend could boost profits,
because the types of appliances bought by new homeowners tend to carry
higher margins.
The bottom line
In conclusion, Whirlpool has some very positive trends in its favor.
If it hits the targets of expanding operating margins and cash flows,
then the stock can appreciate from here. Analysts have it on a consensus
forecast EPS of $11.85 for 2014. This puts the stock on a forward
valuation of less than 11 times earnings, as I write. That number looks
too cheap. Provided the company hits expectations, Whirlpool shares
represent a good value for long-term investors.
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