Buying Whirlpool

Wednesday I bought Whirlpool (WHR/NYSE) at $73.25 per share. The stock closed the day at $76.03. Whirlpool is the world’s largest manufacturer of household appliances.

The market cap is almost $5.8 billion with approximately 78 million shares outstanding. The stock is trading at less than 10 times estimated 2008 earnings and one-third annual sales. The dividend yield is just over 2%.

Whirlpool stock traded for $118.00 this summer but has come down significantly.

Why? Primarily because the company’s fortunes are seen as being tied to the US housing market. Yet Whirlpool reports that just 18% of US shipments are linked to new residential construction -- with more than two-thirds of shipments going for replacement purposes.

Plus, Whirlpool shouldn’t be thought of as a domestic US appliance outfit. A recent Barron’s Online article reports that the company makes 20% of the world’s major appliances -- including washers, dryers, refrigerators, freezers, dishwashers and ranges. The company expects double-digit growth outside the US, especially in Latin America and Asia.

Another reason for investor caution on Whirlpool is the uncertainty surrounding Sears -- Whirlpool’s biggest customer. But the acquisition of Maytag in 2006 (and Whirlpool’s revitalizing of that brand) means the fate of Sears is much less of a concern. Maytag gives Whirlpool distribution reach into 95% of appliance outlets, up from 75% before the purchase, and most importantly entry to Home Depot.

This is yet another holding of Meryl Witmer’s firm. And her firm added to Whirlpool in the last quarter. What’s more, Whirlpool Chairman and CEO Jeff Fettig bought $843,290 worth of the company’s stock (paying $84.33 per share) in the open market in October. Of course, the actions of Witmer and Fettig guarantee nothing about future stock performance.

What are the risks with this pick? Primarily unfavorable changes in business conditions in the company’s markets; further increases in raw material costs (which have been a problem); and delays in achieving benefits expected from acquiring Maytag.

In all, I find Whirlpool stock compelling at current prices. But as I always caution, please do your own due diligence before adding this name to your portfolio.

Comments

[Andy]

I would also say a concern would be uncertainty in consumer spending. Taking a bear view of the economy, we cannot be sure that consumers will be replacing their appliances if times get tight. I can imagine this would be one item people would pull back on or not upgrade if the economy takes a further trip south.

[vdicarmine]

Thanks for intersting idea.

Can you share your opinion on:

1) what is "actual tangible" balance-sheet strength ? (by "actual tangible" I mean deducting goodwill but adding back under rated real-estate or other tangible assets)

2) if there were savings announced when Maytag was bought and if Whirlpool is on track with such savings ?

3) what is your estimate of normalized company earning power on a full cycle basis (i.e. including a small recession) and if you think Whirlpool would remain profitable in a recession period ?

4) what is your evaluation of company intrinsic value and on which figures do you base your calculation ?

Thanks in advance for your comments.

[Ron Paulian]

I really like this purchase. I will do more due diligence on this issue but first glance on Yahoo's key statistics just whet the appetite. I absolutely like this over your other purchases (Foot Locker and American Eagle.)

My only reservation is with the coming financial crisis, is Whirlpool the best bang for our buck?

[John]

Andy: You may be right, and I said "unfavorable changes in business conditions in the company’s markets" in stating the risks when I should have used clearer language. Recessions will hurt sales, yet I believe that would be an intermediate term hit. I could be wrong, though.

vidcarmine: Would you like Coke and fries to go with that order? ;-)

Seriously, I post my reasons for buying a stock and give reasons (risks) it may not work out. But I'm not going to post here for free all the information S&P, Argus Research, and others charges good money for. WHR is not a net-net or discount to tangible book value play. You can get the info you want by visiting the company's website, downloading the reports and SEC filings, press releases, and listening to conference calls.

Ron: I don't know what "the" best bang for our buck is, that's why I spread my investment money out over a bunch of stocks.

[Ron Paulian]

What's your take on the $1B under funded retirement plan?

[Philip the Magnificent]

Check out this blog post:

http://nurseb911.blogspot.com/2008/06/taking-stock-in-whr.html

[John]

Philip: Very interesting link, thanks for posting it here.