General Electric Set to Sell its Home Appliance Business, but at What Price?

According to press reports, General Electric Company is considering selling off its home appliances and lighting division, with figures of $1.5 billion to $2.5 billion being tossed around. While the deal makes perfect strategic sense for General Electric, the price looks too low when compared with home-appliance peers such as Whirlpool Corp . Moreover, the division has significant growth opportunities from the replacement cycle in the home appliance industry, and in LED lighting -- just look at Cree, Inc.  and its LED lighting prospects. So, what sort of price would make sense?

General Electric continues restructuring

From the company's perspective, selling the division would further CEO Jeffrey Immelt's aim of refocusing the company back onto its industrial side. Most people don't consider it a core holding, even though the home appliances and lighting division represents the most visible part of the business to the American consumer.



As for other elements of the company's plans, investors can read here about how it's been investing in its oil and gas division and here about its aviation division. Meanwhile, the IPO of Synchrony Financial, its consumer lending unit, is further evidence of its shift in emphasis toward the industrial sector. Meanwhile, the bid for Alstom's energy business is seen as a sign of acquisition activity in the sector and an attempt to generate cost synergies by consolidating power-generation operations.

In the context of all this activity, the sale of the home-appliances business makes perfect sense. Despite being an iconic business, the division ranks third in the U.S. behind Whirlpool and Electrolux. Moreover, it's the smallest contributor to segmental profitability, and selling it would free up management's time and resources to focus on its industrial operations.


READ THE FULL ARTICLE LINKED HERE

Stanley Black & Decker Earnings Analysis

One of the most consistent investment themes of 2014 so far has been that developed markets have gotten relatively stronger, while emerging markets have weakened. Therefore, what to do about Stanley Black & Decker ? The stock looks like a good value, and there are plenty of reasons to like it, but a large part of its growth prospects depends upon emerging markets. With that said, what are home improvement peers like Whirlpool  and Snap-on Incorporated  saying about end markets, and what should Fools consider before buying into Stanley Black & Decker?



Why emerging markets matter to Stanley Black & Decker
Back in October, investors were treated to an eye-watering mid-teens slump in the stock price as the company lowered its full-year 2013 guidance by more than 10%. The problems in 2013 were focused on the difficulty in raising margins in its security segment (particularly from its acquisition of Swedish security company Niscayah), and weaker growth expectations from its industrial and Construction Do-It-Yourself, or CDIY, segments. In particular, emerging markets had slowed, and sequestration effects had hit U.S. governmental revenue.


READ THE FULL ARTICLE HERE

GE Earnings Takeaways

Whenever a bellwether like General Electric $GE gives results investors will want to analyze them in great detail to see what they mean for other stocks in other sectors. GE's latest earnings were solid enough, but there were many interesting subplots to the story. The global economic recovery has been pretty uneven and inconsistent since 2009, and this theme was further confirmed in its fourth-quarter report.

General Electric's fourth-quarter earnings
GE generated around a third of its segmented profits from its capital division in 2013, but what about the industrial side? The following chart demonstrates the most important industrial sectors for GE.

Source: Company presentations.

GE ended the year strong in its power and water segment with profits up 9% in the fourth quarter, but for the full year the segment's profits actually declined 8%. Of the other three largest segments, oil and gas profits grew 13% in 2013, with aviation up 16% and health care rising only 4%.

The company's order book was up 8% in the fourth quarter, and when discussing the results on the conference call, GE's management guided toward "double digit industrial earnings growth similar to the second half of '13" and "4% to 7% organic growth with expanded margins".

In short, GE looks set for another solid year, and this portends well for the industrial sector, but what are the key takeaways from the results?

Power and water, oil and gas
Gas turbine orders came in at 65 in the fourth quarter versus only 26 in last year's fourth quarter. This was somewhat surprising, because Alcoa  $AA had already estimated that its industrial turbine end market would decline 8 to 12% in 2014. However, the difference in the outlooks may be because Alcoa's forecast is based on production while GE's positive news concerns its orders. If this logic is correct then, provided GE's orders continue to strengthen, investors might expect Alcoa's industrial turbine business to improve in future.

There was mixed news in the oil and gas segment. There are fears over capital spending plans of the major integrated companies, but on the conference call, CEO, Jeff Immelt argued, "If you look at the national oil companies versus the integrated oil companies, our view is that the NOCs really haven't backed off at all, and that's where we see a ton of activity." However, he also said that activity around North American drilling and surface was work was still "reasonably weak" and this tallies with the Baker Hughes  $BHI  US oil and gas rotary rig count.

US Rotary Rigs data by YCharts

Baker Hughes is a leading oil services companies and its North American operations contributed nearly 44% of its segmental operating profit before tax in its first nine months. However, North American segment profits decreased 8% in its third quarter, but strength elsewhere ensured that Baker Hughes' overall segmental profit grew 8%. If GE's commentary is accurate, then that pattern is likely to continue for Baker Hughes.

Home appliances and lighting
As the first graph above outlines, the home and business segment isn't hugely important to GE, but what it says about the segment is useful for shareholders in a white goods company like Whirlpool  $WHR . GE's appliances and lighting revenue grew 6% with its appliance revenue up 9%. Indeed, its appliance sales saw a marked pick-up in the second half:

	Q1 2013	Q2 2013	Q3 2013	Q4 2013
GE Appliance Sales Growth	3%	8%	11%	9%

Source: Company presentations.

This is good news for Whirlpool, because its outlook for North America has tended to match what GE is saying about its appliance business. In fact, in its first quarter Whirlpool estimated its full-year 2013 industry demand to grow at 2%-3%. This figure was raised to 6%-8% in the second quarter, and then 9% in the third. In the light of what GE just reported, is Whirlpool likely to upgrade estimates for 2014 at its next set of results?

The bottom line
On the whole, GE delivered a solid set of results with some interesting puts and takes in the sectors it covers. The following article will cover the health care, transportation and aviation segments. As for the segments covered in this article, there was some good news. Power and water prospects are improving and, internationally at least, oil and gas remains solid. Meanwhile, appliance and lighting sales continue to benefit from the housing recovery.

Home Depot and Housing Have Further to Run

Despite delivering two strong earnings reports, and raising  guidance in each of them, shares of Home Depot   have oscillated between $75 and $80 since June. As such, investors must be starting to wonder what exactly it's going to take for the stock to break out of its range.  

Moreover, if the naysayers are right, buying Home Depot or other housing-related stocks like Whirlpool , Masco, Williams-Sonoma  or Lowe's  could prove a costly error made at the peak of optimism over the housing market. 

The bear case
A pessimistic outlook sees the housing market as stalling at the altar of higher interest rates. In this scenario, the positive news that Home Depot and Lowe's have been reporting is merely a lagging indicator poised to follow the housing market lower in due course.

As this graph shows, both companies have been reporting much stronger same-store-sales growth this year.

Source: company presentations

Against this backdrop, there is no doubt that the housing market has endured a slowdown as a consequence of higher rates. For example, existing home sales have noticeably weakened since interest rates started rising.

Source: National Association of Realtors

If sales continue to weaken and drag home prices down with them, then the housing recovery could easily be snuffed out.

Housing trap being set?
If this scenario is correct, then stocks tied to the US housing market like Home Depot, Lowe's, Whirlpool, Masco, and Williams-Sonoma are almost perfect traps for growth investors. The trap will be sprung if they report strong results in the fourth quarter, as their demand tends to lag the housing market. Investors would then be induced to buy in, only to see their dreams crushed as housing turns downward in 2014.

Indeed, home-furnishings company Williams-Sonoma recently beat estimates and raised fourth-quarter guidance. Moreover, its growth platforms of Pottery Barn, West Elm, and PBteen recorded comparable-brand revenue growth of 8.4%, 22.2%, and 16.7%, respectively. These numbers are a clear indication of discretionary spending returning, but it doesn't stop there.

Building-products company Masco reported that its North American sales were up 12%, with faucet and toilet sales up "in the mid-teens." Masco's plumbing products are a good indicator of spending in the new-home-sales market, and in general, Masco is more geared toward new residential construction.

And finally, appliance-maker Whirlpool has progressively raised its expectations for full-year industry demand as the year has progressed.

Full Year Industry Demand Assumption	First Quarter	Second Quarter	Third Quarter
North America	2% to 3%	6% to 8%	9%
Europe	flat	flat to (2%)	flat
Latin America	3% to 5%	1% to 3%	1%
Asia	3% to 5%	flat	(2%)

Source: company presentations

All of these companies are reporting strong conditions, but is it all just a bear trap that's about to be sprung?

Rates are only part of the picture
Frankly, it would be a mistake just to look at interest rates in isolation. Moreover, the economy tends to behave like a supertanker--it has its own momentum and takes a while to turn around. Right now, employment remains in a steady growth mode, and usually when that happens consumers tend to feel more comfortable about spending.

In turn, financial institutions start seeing better conditions and lending opportunities, so they start to loosen lending criteria. A credit expansion follows, which then drives the economy onward. In usual recoveries, this is accompanied by rising interest rates because there is more demand for capital.

Indeed, Home Depot's management touched on the issue during its conference call when CFO Carol Tome said, "We've regressed ourselves both against 10-year Treasuries and 30-year mortgages, to see if there is any sort of correlation and we can't see it."  

In other words, the housing market isn't just dependent on interest rates. However, Tome did go on to say Home Depot monitored housing turnover (the rate at which houses are sold) and prices. She continued, " If home prices were to decline, then we might have a different point of view on the housing recovery".

The good news is that despite slowing existing home sales, US home prices are rising.

Source: S & P Case-Shiller

The outlook remains positive for housing.

The bottom line
While all of the companies discussed above have their own internal dynamics, the underlying question is the same: is the housing market about to stall or not? If you share the opinion that it won't, then Home Depot is probably the best pure play.

Lowe's is similar, but it also needs to deliver with its plan to reset its product sales. Masco gives you heavy exposure to new home construction. Whirlpool has significant overseas exposure and heavy competition in appliances, while Williams-Sonoma competes in some highly competitive markets too.

Despite The Sell Off, Lowe's Looks Good Value

Investors in Lowe's  must have felt they were living in some kind of parallel universe after the company's excellent set of results were greeted by a 6.2% markdown on the day. As ever, the usual knee-jerk response from journalists was to seek out any possible negative in the company's report or commentary. Lowe's results were a lot better than many made them out to be.

What really happened?
Perhaps the most relevant news on Lowe's results was the old news! The stock had such a major run up before the results that almost anything it said could somehow have been construed as a disappointment.

Not only had Lowe's share price increased by more than 50% in the last year, but it was also outperforming its main rival Home Depot .

Home Depot data by YCharts

While it's true that economic commentators have been becoming a little more cautious on the housing market due to higher interest rates, you certainly wouldn't have noticed it from Lowe's stock performance prior to the results.

Frankly, the sell-off after the results looked like a correction of an overbought move and possibly some hedged pairs trading going on with Lowe's versus Home Depot. In other words, traders might have favored buying Home Depot and shorting Lowe's. 

In reality, there were a number of positives from this report.

First, full-year earnings-per-share guidance was raised for the second time this year and now stands at $2.15.

Second, Lowe's management gave a positive industry outlook. Management forecast that growth would persist in the fourth quarter and went on to state "we expect further acceleration of industry growth next year."

Third, it confirmed that its program of product resets achieved around 100 basis points in gross-margin improvement once the product lines "reached stabilization."The reset program is a project to adjust the products the company sells in order to normalize inventories across categories. Stabilization just refers to when it has cleared out the old inventory.

Clearly, the project is working and Lowe's said that only 66% of its business was stabilized by the end of the quarter. Investors can look forward to margin improvements from the remaining 34% in the future, as well as from the 20% of its business that hasn't even been subject to resets yet.

Finally, the makeup of its sales is suggesting industry strength. Lowe's declared that its Pro sales "continue to outpace our [do-it-yourself] consumer." Indeed, only a day earlier, Home Depot said a similar statement when its management declared "the recovery of our pro business continues in the third quarter, our pro business grew at a slightly faster pace than our consumer business." Both companies see this as a sign of cyclical strength in housing.

In addition, Lowe's performed well with its large product categories such as flooring, kitchens, and appliances. This is in line with what appliance makers like Whirlpool  are saying about the marketplace, and customers' willingness to replace appliances that they bought 10 years ago at the height of the housing bubble. It also confirms the positive outlook in the remodeling market index by the National Association of Home Builders.

Weak spots?The report was generally positive, but there were some points of caution. While appliance sales were strong, the level of promotions was significant enough to reduce the gross margin by 10 basis points. Such developments will obviously concern Whirlpool investors, especially as LG has now been added to Lowe's appliance offerings.

In addition, Lowe's has Samsung and LG appliances highlighted on its floors. This is especially relevant given that Whirlpool won an anti-dumping ruling against LG and Samsung earlier this year.

The second possible sore point was that its forecast of 5% full-year comparable- sales growth implies 4th quarter comps growth of around 4%. As the graph shows, this is somewhat lower than the last two quarters.

Source: company presentations

On the other hand, last year's fourth quarter was positively affected by sales due to Hurricane Sandy. Furthermore, the full-year forecast of 5% is an upgrade from the second quarter guidance of 4.5% and first-quarter guidance of 3.5%. It's hardly bad news.

The bottom line
In conclusion, this wasn't a bad report at all. It's just that the stock had run up too much and investor expectations were probably too high Provided the housing market stays on track, the stock looks to be a good value on a P/E ratio of 17.8 times forward earnings as I write. 

Is Whirlpool a Buy?

If you like the recovery in the US housing market then you probably like the household appliance makers too. Indeed, the recent results from home goods manufacturer Whirlpool   served notice that the industry is in strong shape. However, is all the good news already priced in? Whirlpool is up nearly 35% year to date, is it now time to take some profits? How does it compete against other consumer goods companies, such as General Electric    and Stanley Black & Decker, for your investment dollars?

Whirlpool increases guidance
The recent third quarter results were pretty upbeat. For the second quarter running, Whirlpool increased its full-year earnings per share and free cash flow guidance.

Full-Year Guidance	First Quarter	Second Quarter	Current
EPS	$9.25-$9.75	$9.50-$10.00	$9.90-$10.10
Free Cash Flow (million)	$600-$650	$650-$700	$690-$710

source: company presentations

Note that the mid-point of EPS guidance has risen by 5.3%, but free cash flow estimates have gone up by 12%. This indicates Whirlpool's opportunity to grow cash flow in excess of its earnings growth. In the long-term it aims to generate revenue growth of 5%-7%, earnings growth of 10%-15%, operating margin of 8% (which it reaffirmed it would deliver in 2014), and free cash flow generation of 4%-5% of revenue.

To put these numbers into context, Whirlpool's operating margin (excluding restructuring costs) was 7.6% in the quarter, and the forecasted free cash flow for 2013 would represent around 3.8% of revenue. In other words, there should be more to come next year in terms of earnings and cash flow as Whirlpool approaches its targets.

Believing the numbers
However, it's one thing for a company to have targets and another for investors to believe it can hit them. In the case of Whirlpool, Foolish investors have a number of reasons to be positive.

First, the company is seeing growth accelerate in the right areas. Here's a look at how its industry demand assumptions have changed this year.

Full Year Industry Demand	First Quarter	Second Quarter	Current
North America	2%-3%	6%-8%	9%
Europe	flat	flat to (2%)	flat
Latin America	3%-5%	1%-3%	1%
Asia	3%-5%	flat	(2%)

source: company presentations

Clearly, it's a story of North America strengthening while the other regions are weakening. The good news is that Whirlpool generates most of its profit from North America anyway.

Source: company presentations

Whirlpool generates less than 5% of its sales from Asia, so the weakness in emerging markets that DIY equipment maker Stanley Black & Decker reported recently doesn't apply so much to Whirlpool. Stanley Black & Decker's problem is that emerging market expansion is expected to make up $300 million of its expected $850 million revenue increase over the next three years. Moreover, it is having some integration issues with its acquisition of a European security company, Niscayah.

Second,  the housing market is coming up against the 10 year anniversary of the boom years. If you figure that household appliances have a working life of around 10 years then there should be a significant amount of machines that need replacement in the next few years.

Indeed, the National Association of Home Builders Remodeling Index indicates strength for the industry.

Source: National Association of Home Builders

Third, the rest of the industry is reporting positive results as well. For example, General Electric saw an 11% rise in its appliance sales in the last quarter. In fact, GE has accelerated its appliance sales growth throughout the course of the year, and this nicely mirrors how Whirlpool has increased its North American growth estimates.

	First Quarter	Second Quarter	Third quarter
GE Appliance Sales Growth	3%	8%	11%

source: company presentations

Where next for Whirlpool?
The next few years look good for Whirlpool, provided the US housing recovery stays on track. Moreover, the stock looks to be a good value. For example, the 2013 free cash flow forecast of around $700 million represents 5.3% of Whirlpool's enterprise value.

Furthermore, if the company hits its target of an 8% operating margin then it will be generating significantly more cash flow in future years. With the housing recovery looking like it is still in its early innings there is more upside to come for Whirlpool.

Stanley Black & Decker is Still Not Cheap Enough

The latest results from Stanley Black & Decker (NYSE: SWK  ) probably left investors feeling they had been hit by one if its power tools. The company lowered full-year earnings-per-share guidance by more than 10% to $4.90-$5.00, causing the market to immediately punish the company by selling its' shares off by more than 14%. Has the market overreacted, making right now the ideal time to step in and buy? 

Stanley Black & Decker disappointsTo understand what happened, you must go back to the company's strategic growth plan outlined earlier in the year. In brief, the idea was to generate an extra $850 million in run rate within three years.

Source: Investor Relations Presentations

Fast forward to the last set of results, and the company was forced to reduce earnings and free cash flow guidance. Essentially, it blamed half of the earnings- guidance reduction on slower-than-expected margin improvements in the security market (particularly in Europe), and lower growth expectations in its construction do-it-yourself and industrial markets. The latter two divisions saw weakness due to a slowdown in emerging markets, and the effects of the US government sequestration and shutdown.

Emerging market and government weakness temporary?Eagle-eyed readers will note that the weak spots are in areas that are key elements of the strategic growth initiative. Moreover, the weakness in the emerging markets is especially worrying because the company is planning to generate great leverage out of a relatively low level of plant investment.

One of the ideas behind its 'mid-price-point growth  program' for 2014 is to start to compete with more moderately priced products, because traditionally it sold to the top 10%-20% of the market within the emerging markets. On the conference call, management declared that they felt the emerging market slowdown was:

 "..a slight temporary deceleration, we believe, associated with some macroeconomic pressures we are seeing in these geographies."-Quarterly Conference Call

And for these reasons, the company is not going to make any significant adjustment to its emerging market plans. All told, if the weakness in emerging markets turns out to be lasting, then the company is likely to disappoint next year with a key element of its growth plan.

Two of the key companies to follow in this regardare Whirlpool (NYSE: WHR  ) and General Electric's (NYSE: GE  ) home & business segment which contains its household appliances segment. GE recently reported an impressive 7% growth in revenue for this segment, with household appliances rising 11%. GE and Whirlpool are both interesting, because we are approaching the 10 year anniversary of the peak years of the US housing bubble. In other words, many of the appliances that GE and Whirlpool then will enter their replacement cycles.

Indeed, in its third-quarter outlook, Whirlpool upgraded its North American growth expectations for the full-year, but lowered guidance for Asia, and Latin America. This is the second quarter in a row that Whirlpool has done this. Interestingly, Whirlpool raised guidance for its European region.

Full Year Industry Demand Assumptions	Q1 Outlook	Q2 Outlook	Current Outlook
North America	2% to 3%	6% to 8%	9%
Europe, Middle East & Africa	Flat	Flat to -2%	Flat
Latin America	3% to 5%	1% to 3%	1%
Asia	3% to 5%	Flat	-2%

source: Investor Relation Presentations

Whirlpool raised its full year EPS guidance, but this is mainly due to relatively better performance within developed markets, and particularly North America. Moreover, Whirlpool only generates 4.2% of current sales from its Asia region compared to 55% from North America.

Turning back to Stanley Black & Decker, its difficulties in the public sector couldn't have been unexpected, and they may prove temporary, but it does call into question the future plan to generate $100 million in run rate from the US Government.

No security in security for Stanley Black & DeckerHowever, the deeper concern must be with the slowness of margin expansion in the security division. The problems appear to relate to its acquisition of Swedish security company Niscayah. On the conference call, management outlined three structural issues with regards the integration

• Management underestimated the extent on which Niscayah relied on referrals from its previous parent company Securitas

• Niscayah's senior management team left, and Stanley Black & Decker was forced to replace them and rebuild a sales force

• Niscayah previously had a 'legacy systems integration' rather than the kind of recurring revenue model favored by its US acquirer, and changing it takes time

In short, these issues are slowing the pace of margin improvements in security. It's easy to hear about problems in Europe and quickly conclude that they are macro-related, but note that these issues appear to be company specific. In other words, if Stanley Black & Decker can resolve them internally, then there should be upside to come.

The bottom lineFrankly, I think investors should give the company the benefit of the doubt over the emerging market and US government issues because they may well be temporary. In any case, company expectations have now been lowered so any resolution of these 'temporary' issues should now offer upside potential. However, since much of growth depends on the emerging markets, investors have a right to be concerned. Whirlpool may be a better option for investors looking to avoid emerging market uncertainty.

Stanley Black & Decker's management outlined that it now expects 3% to 4% organic growth in the second half compared to expectations for 6% previously. Free cash flow guidance for 2013 was cut by 20% to $800 million. In addition, for 2014 the management discussed 4% to 6% in organic revenue growth, and a conservative looking 7% to 9% in earnings growth.

 

Cautious investors may well wait to see evidence of improvements with the Niscayah acquisition before jumping in. To be fair, this is a management versed in integrating companies, but on a forward P/E of more than 15 times, this stock is unlikely to be bought by people attracted to its current single-digit earnings forecast.

What GE's Results Say About the Sectors You Should Invest In

Industrial conglomerates like General Electric (NYSE: GE  )  make good bellwethers for different sectors of the global economy -- and if its most recent quarter's any judge, the economy's looking pretty good. 

GE reports broad-based strength

With the sole exception of health care services, each of its six industrial segments reported growth in equipment and services orders. 

The most surprising aspect of GE's report was how strong its power & water segment orders were. The segment has been GE's Achilles' heel this year, but wind units posted strong results, with 477 orders vs. 87 last year. Moreover, GE expects fourth-quarter power & water orders to come in at the higher end of its previous guidance. 

Source: Company presentations.

While it was posted a strong quarter all around, GE's quarterly results always need to be put into the context of ongoing trends, because big-ticket capital machinery sales tend to be lumpy at the best of times.

The key takeaways from GE's third-quarter results

 While this quarter saw broad-based growth, there have been four consistent areas of strength in GE's results throughout the year.

• Commercial aviation
• US home appliances
• Emerging-market health care
• Global transportation

GE's aviation revenue was up 12% in the quarter, but this increase belies a clear distinction between commercial and military aviation. For example, its military orders were down 30% in the quarter. In fact, this story has been replicated throughout the year, as investors have played a game of trying to find the aviation stocks whose revenue is weighted toward commercial aviation.

One obvious beneficiary of this trend is a company like B/E Aerospace (NASDAQ: BEAV  ) . The company makes commercial aircraft cabins, and the stock has soared 57% year to date on the back of record order books at Boeing and Airbus.

Moreover, BE Aerospace just reported its own record order book of $900 million in the quarter, and it announced the first delivery of its modular advanced lavatory system. While that doesn't sound glamorous, the toilet gives airlines a few extra seats on their planes, which could help them increase revenue for each flight for years to come.

GE also announced that household appliances within its home & business segment increased 11% -- an ongoing source of strength. Similarly, Whirlpool has twice upgraded its expectations for end demand from the US.

This must be good news for the home improvement stores like Home Depot or Lowe's Companies (NYSE: LOW  ) . Not only is the current upturn in the housing market helping out spending at Lowe's, but investors need to recall that we are coming up against the 10-year anniversary of the housing boom. In other words, Lowe's should start to see customers coming in and looking to replace white goods that they bought at the peak of the boom. Moreover, Lowe's is strategically resetting its product lines, which is a lot easier to do when markets are picking up.

The third key takeaway is that emerging markets offer far better growth prospects for health care companies. Within its health care segment, GE's developed markets grew 1%, while the emerging markets grew 14% with 33% in China alone. This is a clear sign that investors should be favoring a company like Covidien (NYSE: COV  ) , which can outgrow its health care markets. Covidien's big plus is that its products aren't big-ticket items -- an important quality when selling to emerging markets. Moreover, it can demonstrate a tangible return on investment with things like minimally invasive surgery, and its key endo-mechanical  and energy products still haven't gained much of a presence in emerging markets.

Where next for General Electric?

In conclusion, it was a pretty good quarter for GE, and the return to strength of its power & water segment confirms it's on track to hit analyst earnings estimates of $1.63 this year. This would put the stock at P/E ratio of around 16 -- not a bad value for a stock with a near-3% dividend yield and a good chance of growing faster than GDP over the next few years.

Whirlpool is Still Good Value

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 of Stanley 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

Firstly, its ongoing productivity improvements and restructuring are seeing genuine improvements in margins. Whirlpool’s long-term target is to get operating margins up to 8%, and on current trends, that looks achievable.

Source: Company accounts.

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.

For example, here is the data on total home laundry product shipments from the Association of Home Appliance Manufacturers:

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.

Is Home Depot Stll Good Value?

Investing in anticipation of a housing recovery has been one of the best trades of the last year, but with things like the home improvement stores Home Depot (NYSE: HD) and Lowe’s Companies (NYSE: LOW) hitting new highs is it time to start thinking about reducing your weighting in the sector?

My rationale in asking this question is not to question the validity of the housing recovery but rather to highlight the fact that there may well be other stocks related to it that are have better valuations. Moreover a recovery in the U.S. housing market usually precedes recoveries in other areas of the economy where investors may find investment opportunities.

Home Depot and Lowe’s Companies report

Home Depot’s recent results were certainly better received--initially at least--than Lowe’s Companies, but no matter; both stocks rose afterwards. The truth is that the market has woken up to the housing recovery and wants a piece of investing in it. As for the results, Home Depot continued its recent tradition of raising full year guidance.

Here is how Home Depot has tended to hike guidance over the last few years.

As the housing recovery as strengthened so Home Depot has continued to upgrade its full year revenue estimates. It is now three quarters in a row that it has done this, and in this set of results it noted that its pro business had started to grow quicker than its consumer business. This is a positive sign of recovery, as pro sales are seen as more discretionary-based.

Furthermore the recovery it is seeing in its end markets is becoming geographically spread with areas that were at the epicenter of the housing crisis (California, Florida, Arizona, etc) starting to recover as well.

With that said there were some challenges in the quarter with the spring weather starting a lot later than last year. This made comparables for things like garden and outdoor products a lot lower for Home Depot. However, it said that April saw a strong snap back in growth following a weak March, and May is similarly strong so far.

It was a similar story with Lowe’s Companies. It reported comparables down 10% in March, with April rising 10% and May continuing the positive momentum. In addition, the weather affected its outdoor comparables so that they were down 7%, with indoor rising 3%.

In fact the message from the macro front was pretty much the same. The key operational difference between the two is that Lowe’s has execution risk/return from its reset program. I’ve discussed this initiative in more length in a previous article. Lowe’s is aiming to complete the resets by the end of the year and announced that the percentage increased from 30% to 50% in this quarter. Unfortunately the weather effects helped to ensure that inventory normalization only increased from 20% to 30%, but if what both these companies are saying comes true, then this number should increase in future for Lowe’s.

A note of caution

In summary, both these stocks have upside from a recovering housing market and upside prospects in the current quarter as spring weather finally kicks in. Moreover, Lowe’s should see some upside potential as the benefit of the resets drops into the bottom line.  So, why the note of caution?

My only concern here is that these stocks have come a long way, and now most investors will have somewhat priced in a housing recovery. A look at their evaluations suggests that they are at levels above what they were when the housing industry entered a recession in 2006.

LOW PE Ratio TTM data by YCharts

Frankly I think that momentum and ongoing positive news on housing is going to take these stocks higher. However, investing is about trying to find the optimal ways to generate returns from your views. With this in mind I think it is time to look beyond the evaluations at the home improvement stores and look at some of the wider housing and construction plays.

Two housing and construction plays

Housing recoveries usually predate construction related improvements. New housing projects get developed which leads to new commercial construction. In this regard I think Whirlpool (NYSE: WHR) and Stanley Black & Decker (NYSE: SWK). The interesting thing about Whirlpool is that it offers upside from its push to increase margins. Given that home improvement stores are reporting good numbers it is reasonable to expect that Whirlpool will see a strong spring too. Moreover, we are hitting the 10 year anniversary of the peak of the housing boom so the replacement cycle should start to kick in soon as well. The stock trades on a forward PE of 13.3x and traditionally generates large cash flows.

Turning to Stanley Black & Decker, this stock has upside potential from a housing recovery and a strategic growth initiative with which it intends to generate growth via expanding in selected verticals while benefiting from ongoing merger synergies.

 Its recent results were a bit disappointing, but like Whirlpool it was affected by some temporary weakness in Latin America (both companies argued that it will rectify in future quarters) and from the weather effects of a late spring. At the time of both these companies results I was slightly skeptical over the weather argument but now that Home Depot and Lowe’s have confirmed its effect and, more importantly, argued strongly that growth will come back.I think this is a good sign for Stanley Black & Decker. Moreover the stock trades on trades on a forward PE ratio of 14.6x and is forecasting $1 billion in free cash flow this year.

Time to Buy Stanley Black & Decker?

There are three positive earnings drivers to look out for with Stanley Black & Decker( NYSE: SWK), and if they all come together in 2013, then this stock has significant upside potential. It is a nice mix of value and growth.The company offers a nice mix of improving end markets, ongoing cost savings from synergies created via acquisition integration, and it has a strategic growth initiative in place in order to drive revenue growth and return on capital. In this article, I want to look at how these three facets are playing out so far this year.

End market prospects

The recent results were a mixed bag, as estimates were missed but the full year guidance for EPS and free cash flow was maintained at $5.40-$5.65 and $1 billion, respectively. The strength in its mix of business is undoubtedly coming from its construction and do-it-yourself (CDIY) segment and it is set to continue. Meanwhile, its security and industrial segments have more subdued prospects this year.

A breakdown of segmental profits in the quarter.

The results were superficially disappointing. Organic revenue declined 1% overall, and it was only the 4% contribution from acquisitions that caused the top line growth of 3%. Moreover, cash outflows were greater than expected in the quarter and its core CDIY segment saw flat revenue. It gets worse. Security revenue fell 1% on an organic basis as did industrial revenue. So, is this a story of declining organic growth and an over reliance on acquisitions? And where does the confidence to maintain full year guidance come from?

The 2013 guidance is for mid-single digit revenue growth in CDIY, and flat to low single digit growth for security and industrial, respectively. With regards to CDIY, there were three issues of which two look like they will be rectified in due course.

Firstly, there is a late start to the North American outdoor season which was primarily caused by the weather. Secondly, there has been some temporary weakness in Latin America due to a variety of reasons. Interestingly, Whirlpool (NYSE: WHR) said a similar thing about the region, and in particular with Brazil. Both of these companies are arguing that this is a temporary setback and Whirlpool shareholders should take heart from the positive trends expressed for Latin America in these results. Sequentially, things got better in Q1 and this gives confidence that Q2 will be better for both companies.

The third issue is -- you guessed it -- Europe, but investors need to recall that comparisons are likely to get easier going forward. Security’s exposure to Europe is worrying (and there was some temporary weakness in the Nordic regions), but an extra $15 million of cost synergies from the Niscayah acquistion are expected. This should help out margin growth. It’s a similar story with industrial where moderate U.S. growth is hopefully going to offset weaker conditions in Europe.

Another company displaying confidence in the North American outlook is Masco (NYSE: MAS). This is more of a leveraged play on new housing construction, and its margin expansion and operational leverage opportunities will come from new builds, but its repair and remodeling market is also expected to grow moderately. Frankly, I think the latter tends to key off the former, and as long as there is good turnover in housing, then prospects will get brighter for all the companies discussed here.

Acquisitions working well

The scorecard over its acquisition strategy over the last few years is positive. It has been a difficult few years for housing and construction related stocks, but I think it has done the right thing in trying to drive cost synergies with its acquisitions. As discussed above, there is an extra $15 million to come from Niscayah (security) which should bring the total for 2013 to $50 million, and management is currently evaluating the potential for increasing the targets for 2014.

Strategic growth initiative

I’ve haven’t got the room to discuss this in great depth here, but investors wanting more color on this can find it in an article linked here.

A graphical summary of the plan to increase revenue by $850 million and profit by $200 million within three years is shown below.

Its early days, but the plans were declared as being ‘on track’. Indeed there was a bit of extra investment in this program although there was no adjustment to the targeted CapEx/Revenue figure of 2.5%-3.5%.

The bottom line

This is an attractive proposition and if it can hit its $1 billion in free cash flow, then the stock would be generating nearly 6% of its enterprise value (based on the current share price of $77). This is cheap for a company expected to grow revenue in mid-single digits and earnings in the mid teens for the next few years.

Ultimately, investors will have to price in the uncertainty that it will hit these targets. If you are positive on the global economy, then this stock is going to give you some upside potential and I think a target price in the mid $80’s is not unreasonable. A good GARP candidate.

General Electric Reports Mixed Results

Anyone who has watched the classic sales movie Glengarry Glen Ross or worked in sales will know that the acronym ‘ABC’ stands for ‘always be closing.’ However anyone who hasn’t and instead has solely listened to US blue chip conference calls over the last few years will probably conclude that it actually stands for ‘always be cost-cutting.’ In other words, investing for growth is still on the back-burner in favor of pruning and consolidating measures made in light of uncertain end demand. Such considerations came to mind when considering General Electric’s $GE latest results.

A mixed Industrial Environment

The earliest indication of how the industrial sector was faring was outlined by Alcoa $AA recently, and it was pretty positive in my view. Other than a slight weakening of its European automotive outlook, Alcoa kept its end markets prognosis constant. However, on closer inspection it is clear that Alcoa’s growth prospects in 2013 are highly reliant upon China. In addition it is exposed to a few industries that are doing relatively better.

As this article demonstrates, global aerospace is doing well with airlines surprising on the upside and passenger growth numbers growing at a decent clip. This is obviously good news for General Electric and its aviation segment. In addition, Alcoa’s North American outlooks for its automotive and commercial building & construction segments respectively were for 0-4% and 1-2% with China growing up to 10% in both. Europe is expected to decline in both of these segments. So while China is doing well and some global industrial sectors are doing okay, it is far from a universal situation.

More evidence of this divergence in the industrial sector can be gleaned from looking at what the industrial suppliers like Fastenal and MSC Industrial are saying. Aerospace and auto are fine but elsewhere there was weakness in Q1.

What GE Said

Fast forward to GE’s latest results and the company reported that its industrial segment profits were $200 million lighter than had been expected largely due to Europe being weaker than forecast. The power & water segment was particularly affected while elsewhere GE reported some reluctance to close orders in a few of its shorter cycle industries. Again, the latter statement correlates with what the industrial suppliers (who are as about as short cycle as you can get) indicated.

In order to see the relevance of the power & water segment here is a breakdown of GE’s segmental profitability in the quarter.

As the chart indicates the industrial segments that increased profitability were aviation, healthcare and transportation. GE capital profits improved in line with its rationalization strategy. Overall segment profits were down 4%, but net earnings rose 16% thanks to lower charges and eliminations.

See what I mean about ABC? Indeed, the immediate response to the weakness in the quarter was to announce more cost cutting measures. Plus ca change and all that.

What the Results Mean to The Market

Another area of interest was US healthcare, which GE said was a bit weaker than expected. Investors got an early read on this when Johnson & Johnson gave results and noted (within its medical devices and diagnostics segment) that US hospital procedures were weaker than the hospitals had forecast going into 2013. In addition hospital spending wasn’t as strong. It’s nothing dramatic for Johnson & Johnson because it has plenty of other profit drivers within pharma and consumer products, but for a company like Varian Medical Systems $VAR it is a cause for concern.

I like Varian, and based on a SWOT analysis think it has some very impressive long term growth prospects with its proton therapy solutions. In the near term it can expand its radiation therapy into indications like lung cancer, particularly within emerging markets. In addition its new deal (GE was its former partner) with Siemens (which is pulling out of radiation oncology) gives it a large installed base on which to target. On the other hand its systems require significant outlays, and with Johnson & Johnson and GE reporting some weaker conditions, can we really expect immediate upside from Varian?

On a more positive note GE forecast that its oil & gas and home & business segments are going to be ‘pretty solid’ for the year. Within the latter segment one of its key rivals is Whirlpool $WHR I think Whirlpool has good growth prospects in 2013. The US housing market is recovering, and Whirlpool is starting to anniversary the housing boom of 10 years ago. In other words, the white goods purchased back then should have depreciated by now and a replacement cycle should kick in. Furthermore, GE reported good results in emerging markets so we have reason to believe that Whirlpool will do okay in its key Brazilian market.

Where Next for GE?

Cost cutting isn’t sexy, but it does represent a key bottom line opportunity for GE this year. Europe was weaker than expected but China’s strength was a welcome positive note. As noted above GE’s end markets will be variable this year with areas like aviation, transportation and health care (especially in emerging markets) likely to remain strong and counteract areas more exposed to austerity measures like US military spending and European infrastructural spending.

Investors looking for a more focused exposure to their favorite end markets will not buy GE because of its diversification, but those looking for a 3.5% yielding global GDP type play will view this mini sell-off as a buying opportunity.

Lowe's Companies is Still Good Value

Lowe’s Companies gave numbers on a bad day for the market and the subsequent fall in the share price means investors could be forgiven that for thinking that there was something wrong with them. Then again, that just shows that you should never take the market’s word for it! I thought the results were good and although I also hold Home Depot  I bought some Lowe’s too. No one said you can't buy both!

Lowe’s Equity Research

They may appear to be identical twins but I think Lowe’s has a bit more upside. Analysts are forever trying to make quarter on quarter conclusions over whether Home Depot or Lowe's is taking market share from each other but I don’t think analyzing their relative prospects is as simple as that. In this case, Lowe's has had a lot more execution difficulties than Home Depot following the housing market slump. The good news is that it now has upside from executing its strategy of making product line reviews and resets. In other words, it can play catch up with Home Depot by simply undergoing blocking and tackling measures in its stores.

Of course these things are much easier to do when the housing market is showing signs of strength and Lowe’s recent results reflect this. Ten of its fourteen categories showed growth in the quarter with strength in the larger ticket and more discretionary items like lumber, cabinets, and countertops. The relative weakness in its outdoor and garden sales is only to be expected after the unseasonally warm winter last year made for tough comparables.

Sandy did its bit too and overall comparable same store sales did well, rising 1.9% in the quarter.

 Why Lowe's is a Good Stock to Buy

One issue that concerned the market was the promotional activity that saw some pricing cuts. However, the promotions were targeted at specific items and are part of the program of product line reviews and resets. Lowe's is trying to normailze inventory levels across all its lines. In addition, Lowe's usually has promotions in the fourth quarter, so it’s nothing unusual. The difference this year was actually on the positive side, with the promotions being described as much more balanced than in recent years.

Lowe's has completed 80% of its product reviews and 30% of the resets and its management feels confident that when the other 70% are completed by the end of 2013, gross margins will rise as a consequence. Indeed, it achieved mid-single digit growth in the categories that have already been reset with a 100 basis point improvement in margins. The strategy is working.

I was expecting Home Depot to give a good set of results and it didn’t let the market down. Home Depot confirmed that there was broad based strength in spending across its product categories and geographically the worst affected areas of the property recession are now making sequential improvements. We can see this broad-based strength in the results of home goods companies like Whirlpool  and Masco. Whirpool is doing well in the US (although its international prospects appear less certain) and it has late cycle prospects because new home starts (which should kick in this year) will generate new business when they are sold and inhabited later in the year.  It is a similar story with Masco, which reported North American sales up 12% and its businesses selling into new home construction were up 25%. Both stocks remain good plays on housing.

Lowe's Analysis

Putting these issues together, Lowe's forecasts total sales growth of 4%, with comparable same store sales growth of 3.5% with 3% of the latter coming from internal sources. If you assume that there is a better than expected housing recovery to come, than there could be upside to company guidance.

Analysts have Lowe's on $2.09 EPS for 2013, which implies a near 24% rise in earnings to put it on a forward PE of around 17.7. In addition, it is starting to generate significant cash flows with $2.5 billion in free cash flow generated this year and $3 billion estimated for 2013. This equates to around 6.2% of its current enterprise value and if you share my belief that housing ups and downs tend to be multi-year events, then the stock still looks attractively priced given the outlook.